Is Inflation Over?

After a period of share inflation, during which the Federal Reserve raised rates to tame it, the central bank may have accomplished its goal. Inflation needed to come down to 2%, the Fed said, for the economy to have long-term health. The BEA announced its December “Personal Income and Outlays” data. It rose .2% over the previous month and only 2.9%, excluding food and energy, compared to December 2022.

Was the 2.9% figure still a modest amount above the Fed’s target? Yes. However, that may not be meaningful. “Inflation dynamics inside the metric that the Fed uses to formulate policy strongly imply that the central bank will hit its inflation target in the near term,” Joseph Brusuelas, chief economist at RSM, told CNBC.

The March 2022 Consumer Price Index best shows what caused anxiety at the Fed. After a decade of almost no inflation, it rose 8.5% yearly on a seasonally adjusted basis. Gas prices rose 48%. Fuel oil prices were higher by up by 70.1% year over year. The price of several food items also rose by double digits. Will oil go back to $100?

Although the reason is unclear, as rates rose, including a huge jump in mortgage rates, GDP remained healthy. An expected recession, which rate increases were supposed to cause, never materialized. Unemployment stayed well under 4%. Consumer spending did not falter.

Where does inflation go now? Either the Fed’s work will continue to have positive effects, or the one thing that could drive inflation back up again will occur. The number of container ships turning away from the Suez Canal because of Yemen’s Houthi rebels attacks means the supply chain across a number of industries will tighten as it did during the early and middle parts of the pandemic. If that happens, the Fed won’t drop rates. It might increase them again.