Inflation Takes Three Years to Fall to 2% in Cleveland Fed Model

Inflation may not return to the US central bank’s 2% target until mid-2027, according to research from Federal Reserve Bank of Cleveland.

That’s because the inflationary impacts of pandemic-era shocks have largely resolved and the remaining forces that are keeping inflation elevated are “very persistent,” Cleveland Fed economist Randal Verbrugge wrote in a report Thursday.

The model behind Verbrugge’s research distinguishes between extrinsic dynamics, or the impact from external shocks, and intrinsic dynamics, or how inflation behaves absent those shocks.

The return of supply chains to normalcy has contributed to the recent progress on inflation, leading to declines in the prices of certain goods. But that progress now seems to have run its course.

Two measures of inflation tied to supply chains, the Federal Reserve Bank of New York’s global supply chain pressure index and the PPI for core intermediate goods, have gone sideways, suggesting downward pressures from those sources are “nearly over,” said Verbrugge, who specializes in inflation modeling.