Subscriber Benefit
As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe Now
Last week’s consumer price index report was bad news for the economy. The U.S. Labor Department’s all-item 12-month price index rose 3%. Not only is this well above the Federal Reserve’s target of 2% for annual inflation, it is the fourth consecutive month the inflation rate has risen. After trending down to 2.4% in September 2024 from 3.5% in March 2024, inflation has been on the rise.
Of course, all economic data is flawed, so the CPI statistics might be a fluke. But the odds of drawing four black balls out of a tub that contains half white balls is only about 6%. So the results are not likely to be too far off.
Other indicators also signal that inflation has not been tamed and might be rising. The St. Louis Federal Reserve’s five-year break-even expected inflation measure, derived from the difference in yield from inflation-indexed and non-indexed bonds, fell below 2% in August 2024. We had all hoped this was a sign inflation had been tamed by the Federal Reserve’s previous policy of setting short-term rates as high as 5.5%. The Federal Reserve apparently thought so, too, and cut interest rates in September a half-percentage point and then another quarter-percentage point in both November and December.
However, the St. Louis Fed’s inflation expectation measure broke the 2% mark on Sept. 19, perhaps not coincidentally the day the Fed cut interest rates, and continued to rise to 2.46% on Nov. 6, the day after the presidential election. It stayed relatively stable until Jan. 6, when the Electoral College certified the presidential results, then rose to 2.62% in our most recent reading.
Inflation is likely to remain stubborn, since there are numerous potential sources for price increases. An aggressive tariff policy increases the prices of both domestic and imported goods. This is because American producers face less competition from foreign competitors and because many imports are inputs for domestic goods. In either case, American producers increase their prices. In addition, trade wars, regional conflicts and unpredictable fiscal and monetary policies lead to inflation uncertainty, typically leading to reduced investment and less American industrial production.
The only guaranteed way to whip inflation now is for the Fed to raise interest rates immediately and significantly. But that would almost certainly trigger a recession. While we seriously doubt the Fed will raise rates anytime soon, it will probably not cut interest rates in 2025.•
__________
Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
Please enable JavaScript to view this content.