
What's going on with US inflation? Is it still something that we need to worry about? Is 3% per annum of inflation too much, and is 2% "just right"? Will the Fed continue to keep interest rates at high levels to get it back below that benchmark?
These are the questions that we have. We can't evade the issue, because everybody hates retail inflation and markets hate high interest rates, because it raises the cost of capital for big companies.
Inflation spiked in 2021 after Covid caused chaos in global supply chains. The Russian invasion of Ukraine added to those concerns. Inflation is like a genie in a bottle, once it gets out it's hard to stuff back in. Once prices start rising, businesses want to raise theirs. Inflation expectations rise, so everyone wants an escalation clause in their contract. This is especially true of banks and landlords, with housing, mortgage and rental accommodation prices. Collectively this expense item is called "shelter".
Anyway, my view is that the inflation spike from 2021 to 2023 was transitory, it just took a lot longer to go away than we hoped. As you can see from the chart below, posted by Eddy Elfenbein, inflation (in red) was at 2% before Covid, went much higher to 9%, and is now back down at 3%. The Fed seems stuck until it falls further, which is a drag, but it will cut rates when shelter prices (in blue) decrease some more.
As with most crises, if you wait long enough, they go away by themselves.