4 Reasons High Inflation Hasn’t Gone Away | Global News Avenue

Higher-than-usual inflation has been hurting household budgets since 2021. What’s stopping prices from returning to normal?

As of January, inflation, as measured by the consumer price index, had been below the Fed’s 2% annual target for three years and 10 months. Although inflation has fallen sharply from its peak in 2022, the Fed has not yet completely curbed it.

Economists have identified several powerful forces that cause inflation to become disturbingly overheated. In comments this week, Deutsche Bank macro strategist Henry Allen identified four factors holding back inflation in the short term.

Fed cuts interest rates

The Federal Reserve has lowered its benchmark interest rate to last three meetingsstarting in September. A rise in the federal funds rate would push up interest rates on a variety of loans to businesses and individuals, discourage borrowing and spending and act as sand in the gears of the U.S. economic engine.

The Fed lowered interest rates by one percentage point to a range of 4.25% to 4.5% – still high enough for Fed officials to consider them “restrictive” or a drag on the economy. But lowering rates would bring more money into the system and could increase inflation, Allen wrote.

tariff talk

President Donald Trump has pledged to impose steep tariffs on U.S. trading partners, especially China, upon taking office. Economists say businesses may Pass most import taxes on to customerspushing up prices.

What’s more, the impact of tariffs may be more than just a one-time increase in prices. As the pandemic has proven, the cost of one item has ramifications throughout the supply chain. For example, when COVID-19 restrictions in Taiwan disrupted computer chip production, prices for a variety of products rose, surprising policymakers.

Austan Goolsbee, President of the Confederacy. The Chicago Reserve Bank noted in this week’s online Q&A:

“Supply chains are more integrated, more complex and extend over longer periods of time than we thought,” he said. “When computer chips are in short supply, it affects electronic components, which then affect cars, which then affect delivery companies.”

psychology

The public is bracing for higher inflation in the year ahead According to the latest consumer confidence survey by the University of Michigan. Many economists believe that if people think inflation will be higher in the future, they will run out of stuff and buy stuff more quickly in response to higher prices, stimulating demand and pushing up prices.

“Higher inflation expectations risk becoming a self-fulfilling prophecy if businesses and consumers begin to price and bargain based on higher expectations,” Allen wrote.

oil price

Commodity prices have been rising in recent months, especially oil. WTI crude oil futures were trading near $78 a barrel on Thursday, up from $68 a barrel in early December. High demand for heating oil, coupled with new U.S. sanctions on Russia, a major oil producer, over its invasion of Ukraine has put upward pressure on prices.

AAA said Thursday that the national average price for a gallon of regular gasoline rose nearly 4 cents last week to $3.10 due to rising gas prices. Gas prices are a major line item in household budgets, so they heavily influence inflation measures such as the Consumer Price Index, and they can also push up transportation costs and affect the cost of other goods and services.