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.
That means getting the rest of the way to the Fed’s 2% target relies on intrinsic forces, like wage growth and firms changing prices, which take longer to influence the rate of inflation, he said.
Fed officials have held interest rates in a range of 5.25% to 5.5%, a two-decade high, since last July. A measure of underlying US inflation ticked down in April for the first time in six months, after disappointing readings in the first quarter.
Still, many policymakers have said recently they need to see more evidence that inflation is on a steady path downward before they would have the confidence to begin cutting interest rates.
New York Fed President John Williams said Thursday that he expects inflation to fall to about 2.5% by the end of this year before moving closer to 2% next year. Fed Governor Christopher Waller said last week the bank could consider lowering rates at the end of 2024 as long as the next several months of data supports doing so.
If the Cleveland Fed model turns out to be right, the central bank may be keeping rates higher for longer than that.
“The analysis suggests that the intrinsic dynamics of inflation are very persistent. It also suggests that, going forward, inflation will be mainly governed by its intrinsic dynamics,” Verbrugge said. “Hence, according to this analysis, inflation could take several years to return to its target.”
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Alex Tanzi
