With the exception of goldbugs, almost everyone seems to have abandoned their inflation worries. The Federal Reserve is easing again, Wall Street stocks and bonds are rising in tandem, and even the bruised dollar has perked up a bit.<\/p>\n
The Fed\u2019s strict 2-per-cent inflation target seems to be a thing of the past.<\/p>\n
And yet financial markets are chattering about a U.S. economy about to be run \u201chotter,\u201d an investment super-cycle that could extend for years and supply chain disruptions that could reverberate through 2026 and beyond.<\/p>\n
Unless AI magically blows up all those potential bottlenecks, we\u2019re likely to see inflation heat up too.<\/p>\n
The extent to which households and businesses seek recompense for these price increases, insurance against them or even seek electoral retribution is an open question.<\/p>\n
But one thing is clear: the U.S. inflation regime is in a very different place from where it was before COVID-19 hit.<\/p>\n
Friday\u2019s release of the September U.S. consumer price report will provide a rare piece of economic clarity amid the official data outage that has accompanied what is now a 21-day government shutdown.<\/p>\n
Even though the Fed\u2019s leading lights appear to have convinced themselves that tariff-related price rises will just be one-off blips, the CPI update is likely to make uncomfortable reading.<\/p>\n
The consensus forecast is for headline inflation to top 3 per cent for the first time in well over a year, marking a fifth straight month of annual inflation gains. That would put both headline and \u201ccore\u201d inflation more than 1 percentage point above the Fed\u2019s 2-per-cent target, raising the question of whether it\u2019s still a target at all.<\/p>\n
Even if you assume the tariff impact on prices will be \u201ctransitory\u201d – itself a faint echo of the Fed\u2019s much-criticized view on the initial post-pandemic inflation burst – the price pressure hits in what some economists assume is a structurally higher-inflation economy.<\/p>\n
Fernando Martin at the St. Louis Fed wrote last week that an updated analysis of national inflation trends suggests the United States may now be in a \u201cpersistent above-target regime.\u201d<\/p>\n
On one level, that\u2019s uncontroversial and easily observable.<\/p>\n
Headline inflation was below target for 90 per cent of the nine years between when the Fed formally adopted its 2-per-cent goal until March 2021, with the Fed\u2019s favored gauge of price increases, \u201ccore\u201d personal consumption expenditures (PCE) inflation, above 2 per cent for just four months. Both measures have been above 2 per cent ever since.<\/p>\n
What that means for households is that prices are about 20 per cent higher on average than before the pandemic, a factor that played a big role in last year\u2019s U.S. presidential election.<\/p>\n
Martin divides up the past 13 years into three periods, showing average inflation averaging 1.5 per cent from 2012-2020, 5.5 per cent during 2021-2022 and now 2.7 per cent from 2023-2025.<\/p>\n
\u201cArguably, we are now in a situation that mirrors the prepandemic era, with inflation moderately but persistently above the target,\u201d he wrote, adding that more than half of consumption expenditures are still on products experiencing annual inflation of 3 per cent or more.<\/p>\n
What\u2019s more, the distribution of price moves is still skewed to the upside despite inflation easing from recent peaks.<\/p>\n
Inflation expectations, whether market- or survey-based, are also clearly higher than pre-pandemic readings, now sitting in the 2.4-per-cent to 3.0-per-cent range. Many Fed officials still characterize this as \u201canchored,\u201d or close enough to 2 per cent that it makes no difference. Indeed, Fed board member Chris Waller – tipped by some to be the next Fed chair – opined last week that inflation is basically at target, and even floated the idea that an inflation range, rather than a point target should now be considered.<\/p>\n
With most of the Fed\u2019s top brass now focused on the labor market, it appears that many policymakers aren\u2019t overly concerned about inflation that is within a point or so of 2 per cent.<\/p>\n
That\u2019s a curious asymmetry when compared with the Fed\u2019s seeming obsession with slightly undershooting its inflation target before COVID-19 hit, which resulted in years of near-zero interest rates and repeated waves of bond buying.<\/p>\n
But consumers and businesses might not feel the same way.<\/p>\n
The purchasing power of US$1,000 today would be reduced to US$820 in 10 years time under a steady 2-per-cent annual inflation scenario. It falls to US$744 in a 3-per-cent regime.<\/p>\n
Can the U.S. \u201ceat\u201d that without households demanding higher wages or businesses seeing purchases slump? Maybe, but no one\u2019s 100 per cent sure.<\/p>\n
What\u2019s more notable, however, is that almost no one seems to care right at this juncture.<\/p>\n