Inflation’s “last mile” is the trickiest
Back in June, the annual inflation rate was 9.1%. It’s been slowing every month since then. But fighting inflation is a long race, and the last mile is much harder than the first.
If you like hearing about inflation, you’re gonna love this week. On Tuesday, we get the latest consumer inflation numbers. Then on Wednesday, the Federal Reserve will almost certainly attempt to strike another blow against rising prices with another interest rate boost.
Grappling with inflation may be like a marathon, but it starts off as a sprint.
“Areas where it’s very normal to have frequent price changes, we’ve seen inflation already come down dramatically,” said Laura Veldkamp, a professor of economics at Columbia. “So, at the gas pump for example.”
And the inflation that was a direct result of the pandemic — everyone buying goods online, supply chains breaking — that’s evening out. Adobe reports online prices, for example, which lean heavily towards goods, actually fell 3% in November. Freight rates have come down by two thirds in a year. That kind of stuff should bring overall inflation down pretty fast.
“I think there’s a good chance we will be down to 4% by the end of 2023 and maybe sooner than that,” Veldkamp said.
But then, there’s everything else.
“Getting inflation all the way back down to 2% on a sustained basis, that’s going to require a cooler labor market,” said Sarah House, a senior economist with Wells Fargo.
Labor is most businesses’ number one cost by far, House said.
“Until you get labor costs growing at a slower pace that looks more consistent with the Fed’s 2% target, you’re still gonna have an elevated pace of inflation,” she said.
Wages have increased the most at the lower end of the income spectrum, even outpacing inflation for some people.
“Which from a social perspective, is a very good thing,” said Markus Brunnermeier, a professor of economics at Princeton. “But it also means, as low income workers often work in the service sector, there’s more price pressure, so inflation in services sector will stay higher for a longer period of time.”
But right now, a lot of people are pushing for wage increases just to keep up with the inflation we’ve already had, let alone what’s coming. That’s a tough cycle to break.
So how long will it take to get back down to 2% inflation? Experts say years.
Stories You Might Like
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.
