The wave of inflation in the past few months is not expected to grow into an inflation tsunami of the kind that rocked the United States as it emerged from the pandemic.
Inflation crested at nearly 9% in June 2022 under then-President Joe Biden — the worst in generations — but has generally fallen since, and dipped to near the Federal Reserve’s 2% target at the start of this year. Since the war in Iran, it has shot back up to 4.2%, leading some to wonder if the worst is yet to come, or even if the U.S. could suffer a second round of even worse inflation, as happened in the late 1970s.
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But experts say the fundamentals underlying the 2021 and 2022 bout of inflation are markedly different from what is driving the most recent uptick.
“The reason we’re not going to get 9% inflation is because monetary policy is under control,” Ryan Young, senior economist at the Competitive Enterprise Institute, told the Washington Examiner. “The COVID inflation came from $5 trillion of balance sheet growth, so that was monetary.”
When inflation began spiking in early 2021, the economy was emerging from the pandemic, and the government was pumping stimulus money into the economy while the Fed held interest rates near zero for an extended period.
Right now, the Fed’s interest rate target range is 3.50% to 3.75%, and many investors expect the Fed to raise rates again this year.
What is driving this year’s multimonth surge from 2.4% inflation in January to 4.2% as of last month is almost entirely energy price increases from the war with Iran.
Oil and gasoline prices shot up as oil tankers were blocked from transiting the Strait of Hormuz, causing headline inflation to move higher in turn. Stripping out volatile energy and food prices, though, so-called core inflation is running at a more manageable 2.9%.
Many, including Treasury Secretary Scott Bessent, say that when the war wraps up and energy prices continue to fall, headline inflation will come back down as well.
“We’re probably at or near where it’s going to peak, in the low 4s,” Young said, referring to the 4% level inflation is hovering around right now.
Mark Hamrick, chief economic analyst for the Hamrick Brief, also pointed out to the Washington Examiner that not only are economists not expecting an inflation wave as in 2022, but neither are Fed officials.
Every other meeting, the central bank releases updated multiyear projections for inflation, gross domestic product, and unemployment. At its meeting last month, Fed officials seemed to agree that inflation would cool off some by the end of the year, rather than move higher.
The officials said they see inflation, as gauged by the personal consumption expenditures index, running at 3.6% by the end of the year.
Hamrick said there were a “handful of factors that converged” that allowed inflation to spike to 9% following the pandemic.
He noted the trillions of dollars pumped into the economy by Congress during the pandemic, the Fed holding interest rates so low for so long, quantitative easing by the central bank, increased household savings from the lockdowns, and more.
“Then we also had the supply chain disruptions that began with the pandemic and then got a second act with Russia’s invasion of Ukraine,” Hamrick added.
The Fed under former Chairman Jerome Powell held rates low even as inflation was increasing. Powell infamously said inflation would be “transitory.” New Fed Chairman Kevin Warsh, on the other hand, appears to be focused on bringing inflation back down.
At a press conference following his first Fed meeting as chairman last month, Warsh said the Fed’s statement from the meeting indicated that the central bank is “unambiguously and unanimously” committed to bringing inflation down to its 2% target.
One factor boosting the odds that the Fed increases rates in the next few months is that the labor market has remained resilient.
The economy has added jobs at a pace strong enough to keep unemployment trending down. The economy added 57,000 jobs last month.
The unemployment rate fell one-tenth of a percentage point to 4.2%, the Bureau of Labor Statistics reported on July 2. That is low by historical standards.
Also, while President Donald Trump repeatedly admonished Powell for not cutting interest rates, he has — at least for now — seemed to back off on such an aggressive posture with Warsh.
The Washington Examiner spoke with the president by phone Friday morning, and Trump indicated that he will defer to Warsh on interest rates. And markets are now pricing in about a 76% chance that the Fed will raise rates before the November midterm elections.
“There should be a reduction, but I’ll go with the chairman,” Trump said.
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Regardless of what happens with interest rates this year, the factors at play simply don’t warrant the same concern for an inflation tsunami like what the country experienced a few years ago.
“It’s hard to see how you could replicate this convergence of events that occurred in recent years that would all then contribute to that truly historically outsized burst of inflation,” Hamrick said.