MW Inflation is an 'economic thief.' Can the Fed finally arrest the frustrating rise in prices?
By Jeffry Bartash and Greg Robb
The last time inflation was low and largely invisible was in 2021. The Fed hasn't hit its 2% target since then.
The last time U.S. inflation was below 2%, Tom Brady was the reigning Super Bowl MVP as a member of Tampa Bay Buccaneers.
It was February 2021. NFL great Tom Brady had just won the last of a record seven Super Bowls. Amazon founder Jeff Bezos said he was stepping down as CEO. And an experimental COVID-19 vaccine was being administered to millions of people.
It was also the last time U.S. inflation ran below 2% - and the last time Americans were untroubled by rising prices.
The Federal Reserve, the nation's inflation watchdog, is approaching an uncomfortable milestone. When top officials gather this week in Washington, D.C., it will be five years since the inflation rate was below the central bank's 2% target.
Can the Fed return the U.S. to an era of very low inflation - and keep it there? Most economists believe a 2% rate is doable, but how long it takes to achieve and whether the Fed can keep it that low are big questions.
"There is a legitimate debate on the Fed's inflation-fighting credibility given how long inflation has persisted," said Diane Swonk, chief economist at KPMG US.
The Fed also faces some high hurdles. The aftershocks of the pandemic are still being felt, new trade barriers are going up around the world, labor is in short supply and the main tool to control inflation - interest rates - is a blunt instrument with limited effectiveness.
The stakes for the Fed and the U.S. economy are immense. Higher inflation hurts in countless ways: It raises the cost of living, erodes living standards and makes it more expensive for homeowners to borrow and businesses to invest. No part of the economy goes untouched.
"We should never underestimate how much people hate inflation - and for good reason," said Jeffrey Schmid, president of the Kansas City Federal Reserve. "Inflation is an economic thief."
COVID's legacy
The five-year bout of high inflation is part of the pernicious legacy of the coronavirus pandemic that began in 2020.
Washington pumped trillions of dollars into the economy to stave off recession, with the Fed slashing interest rates to zero and the White House doling out huge sums to families and businesses.
The result was too much money chasing too few goods, especially given constant disruptions that limited what businesses could produce. The rate of inflation had spiked to a 40-year high of 7.2% by mid-2022.
A tardy Fed, slow to recognize the problem at first, finally responded in 2022 by jacking up interest rates to tame inflation.
By early last year, just as President Donald Trump was starting his second term, the Fed even appeared tantalizingly close to hitting its 2% target. The rate of inflation had slowed to 2.3%, using the central bank's preferred inflation gauge.
Then came the Trump tariffs.
The president launched the biggest trade wars in decades, imposing steep duties on most goods imported from the rest of the world. Inflation began to waft higher.
"I would argue that at the end of 2024, had policies not changed, it's quite possible that we'd be much closer to 2% inflation," former Boston Fed President Eric Rosengren said in an interview with MarketWatch.
The rate of inflation moved back up to 2.8% as of November, data delayed by the federal shutdown now show. Economists predict it will finish 2025 close to 3%.
Elevated inflation is expected to spur Fed officials to leave a key interest rate unchanged on Jan. 28 after their first meeting of the new year.
They are likely to wait until there is more evidence inflation is slowing again before they reduce borrowing costs, former Dallas Fed chief Robert Kaplan said in a TV interview.
January effect
Fed officials might have to wait awhile. Inflation could get even worse to start off 2026, since January is when companies adjust pricing for the year. Many Wall Street DJIA SPX economists expect a bump higher.
In a CNBC interview, Amazon (AMZN) CEO Andy Jassy said tariff-driven price hikes are beginning to show. Vendors are starting to run out of goods they stockpiled ahead of the tariffs, and consumers "will be starting to see more of an impact."
Still, most Wall Street economists and top Fed officials believe inflation will subside in the second half of the year. They argue the effects of tariffs led to a one-time increase in prices that is already fading.
Fed leaders, for instance, predict inflation will slow to 2.4% this year and to 2.1% in 2027. Many private-sector forecasts show a similar path for inflation.
Neil Dutta, head of economics at Renaissance Macro Research, points to three trends that are likely to nudge inflation lower this year: cheap oil, muted labor costs and a slower increase in rents and home prices that is closer to the historic norm.
"The three primary conduits for sustained inflation are housing, labor and energy," Dutta pointed out. All of them are headed in the right direction.
There are still plenty of pockets of inflation in the economy, however, and other analysts suspect progress in lowering inflation will take longer to achieve.
Omair Sharif, president of Inflation Insights, an influential research firm, points to the rising cost of healthcare and transportation services such as car repairs and auto insurance. These are big expenses for most families.
Rising inflation?
A return soon to 2% inflation is also far from a widely accepted view.
Some prominent economists say the spillover from the Trump tariffs and the White House crackdown on immigration isn't over. In their view, inflation is likely to keep rising before it starts falling again.
Prominent economists Adam S. Posen and Peter Orszag contend in a widely read article that inflation could get worse.
They blame a tariff hangover, excess government spending in an election year, the Fed's cheap-money strategy and higher labor costs. A reduction in immigrants will reduce the supply of labor and could force businesses to raise wages to attract workers.
"We think it is more likely that inflation will surprise to the upside -potentially exceeding 4% by the end of 2026," they wrote. Posen is the president of the Peterson Institute for International Economics and Orszag is the CEO of the financial firm Lazard.
Hard to control
Yet whether it takes a year or more, most economists still think a 2% inflation rate is a suitable and achievable goal. The Fed first adopted an official target in 2012 to show the public its inflation-fighting resolve.
Economists just aren't sure the Fed can keep it there.
"Is 2% possible? Yes, it is achievable. Absolutely. But maybe not on a sustained basis," said Luke Tilley, chief economist at Wilmington Trust and a former Fed official.
How come? Inflation is hard to control, especially in the short run.
The Fed's main tool to keep inflation low is interest rates - raising them tends to slow the economy and reduce upward pressure on prices. Yet interest rates are a blunt tool, and it can take many months for higher borrowing costs to start to tame inflation.
What's more, inflation can surge for reasons well beyond the Fed's control. The Russian invasion of Ukraine in 2022, for example, exacerbated the surge in global inflation by pushing up oil and food prices.
"If you get to 2% inflation, you are not going to stay there," said Richard Moody, chief economist of Regions Financial.
The best hope for the Fed, then, is to get inflation low and confine annual price increases to a stable and narrow range.
"Economists have a hyperfocus on 2%," Tilley said. "Anything from 1.5% to 2.5% - as long as it stays in the band - it's pretty good."
No price relief coming
Will such success, if you want to call it that, comfort anxious Americans frustrated by years of rising prices? Probably not.
"Does it mean prices are falling? No, they are just rising at a lower rate," Moody said.
Even a slower increase in inflation does nothing to ease the financial strain on families that are paying, in many cases, prices for staples that are 30% higher or more compared with five years ago.
"That has made it very difficult for a majority of households," Swonk of KPMG US said.
It's a bitter pill to swallow for Americans, especially younger generations that never have lived through a period of high inflation before.
Prices rose an average of just 1.5% a year from 2010 to 2020, for instance, and the cost of some staples such as groceries actually fell. People simply didn't even have to think about inflation.
Inflation was so low, in fact, that Fed leaders actually thought it was too low. They worried it could turn into deflation, a major scourge of the economy during the Great Depression in the 1930s.
Those worries are long gone now.
-Jeffry Bartash -Greg Robb
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(END) Dow Jones Newswires
January 23, 2026 15:29 ET (20:29 GMT)
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