Cleveland Fed: It could take years to meet 2% inflation target

A customer shops for food at a grocery store. (Photo by Justin Sullivan/Getty Images)

Recent years have seen spiking inflation as a result of a number of shocks, including supply bottlenecks caused by the coronavirus pandemic and Vladimir Putin’s invasion of Ukraine. As those shocks have eased, the Federal Reserve Board’s Open Market Committee has set a target of reducing inflation to 2%.

However, according to a report released Thursday by the Federal Reserve Bank of Cleveland, it could take several years to achieve it. The reason: While external factors such as supply chain disruptions have eased, intrinsic ones are showing persistence, the report said.

Randal Verbrugge, senior research economist at the Cleveland Fed, used several computer models to look at inflation in “personal consumption expenditures,” or what Americans pay for goods and services. That inflation has dropped from a high of nearly 5% at the height of the pandemic in spring of 2022, down to 2.7% last year before going back up above 3% now. 

This could be a transitory blip.

“The majority view among forecasters, as measured by the May 2024 Blue Chip Financial Indicators Consensus, is that inflation will indeed continue to fall apace, leaving four-quarter PCE inflation near 2 percent by the middle of next year,” Verbrugge writes.

But he doesn’t think so. Instead, he used modeling that predicts that inflation won’t drop back to 2.7% until the second quarter of next year and won’t reach the Fed’s goal of 2% until 2027.

“If the extrinsic forces that have lately been pushing down inflation, notably, the resolution of supply chain issues, have run their course, then the last half mile could take several years,” Verbrugge said.

Why? Because of “intrinsic inflation persistence.”

Those are internal factors driving inflation. To give an example, the Federal Reserve Bank of Richmond last September wrote that such inflation “can emerge from the fact that price changes are staggered across firms or products, as not all firms change their prices continuously. Rather, at any given point, some firms opt to change their prices, while others keep them fixed and wait to change them later. Therefore, inflation remains high because of the time it takes for all firms to react more broadly to a change in monetary policy or the economic environment.”

Not mentioned in either report was the role consolidating marketplaces and decreasing competition might play in driving intrinsic inflation.

In an October 2022 paper, the Organization on Economic Cooperation and Development made such a linkage.

“To sustain inflation, there would need to be a constant degradation in the level of competition such that prices continue to rise,” it said, adding that over previous decades in the United States and Western Europe, price increases have accompanied market concentration and increasing profitability.

Antitrust authorities in the United States now appear to be taking steps to address concentration and vertical integration:

The Federal Trade Commission this year completed an investigation of pandemic-era inflation of grocery prices. It found that the biggest grocers — Kroger, Walmart and Amazon — engaged in anti-competitive practices to make the inflation worse and continue to do so. The agency said it would use the findings as a starting point for further action.
The FTC is in the midst of an investigation of pharmacy benefit managers, powerful middlemen, the largest three of whom control 80% of prescription transactions that are covered by insurance. Critics say the companies are the biggest culprits in the rising cost of drugs. 
The U.S. Justice Department and Ohio Attorney General Dave Yost last week sued to break up Live Nation and Ticketmaster on charges that the company has a stranglehold on ticket sales, concert promotion and the best venues. The effect, the suit claims, is that fans get soaked as artists are starved.

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