Source: Golden Ten Data
Cleveland Federal Reserve economists say that the remaining factors that currently keep inflation high are “very stubborn.”
According to a Cleveland Federal Reserve study, inflation may not return to the 2% target set by the Federal Reserve until mid-2027.
Cleveland Federal Reserve economist Randal Verbrugge (Randal Verbrugge) wrote in a Thursday report that this is because most of the inflationary effects caused by the impact of the pandemic have been resolved, and the remaining factors that have kept inflation high so far are “very stubborn.”
There is a model behind Flug's research that distinguishes between exogenous dynamics (that is, the effects of external shocks) and endogenous dynamics (that is, how inflation behaves without these shocks).
The return to normal supply chains in the US has contributed to recent developments in inflation, leading to lower prices for some commodities. But that progress now appears to be coming to an end.
Flug, who focuses on the inflation model, said that two supply-chain-related inflation indicators — the New York Federal Reserve's Global Supply Chain Pressure Index and Core Intermediate Goods Producer Price Index (PPI) — have stabilized, indicating that downward pressure from these sources is “almost over.”
This means that to reach the Federal Reserve's 2% inflation target, the rest of the work will depend on endogenous forces, such as wage growth and corporate price adjustments. The impact of these factors on the inflation rate will take longer.
Since July of last year, Federal Reserve officials have consistently maintained interest rates at a 20-year high of 5.25% to 5.5%. After disappointing US inflation data for the first quarter, an indicator of potential US inflation fell for the first time in six months in April.
Despite this, many policy makers recently said that before they are confident to start cutting interest rates, they need to see more evidence of a steady decline in inflation. New York Federal Reserve Chairman Williams said last Thursday that inflation is expected to fall to about 2.5% by the end of this year, and will be further close to 2% next year. Federal Reserve Governor Waller said last week that as long as the next few months of data support, the Federal Reserve may consider cutting interest rates at the end of 2024.
If the Cleveland Federal Reserve's model predictions are accurate, then the Federal Reserve may need to keep interest rates “higher for longer.” Fluger said, “The analysis shows that the endogenous drive for inflation is very enduring. At the same time, it shows that future inflation will mainly be dominated by endogenous dynamics. Therefore, according to this analysis, it may take years for inflation to return to target levels.”
Editor/jayden