In an economic landscape shaped by the aggressively rising prices of 2020-2022, the Federal Reserve’s monetary policy pendulum swung dramatically. Starting from rock bottom rates, it engaged in a series of hikes the likes of which had not been seen since the early 1980s, moving from less than 1% in February 2022 to over 4% a year later. Going still higher with rates above 5% by the end of 2023, the Federal Reserve held rates there for the first half of 2024 in an attempt to bring the Consumer Price Index (CPI), one of its preferred price gauges, down from the scorching 9% peak in the summer of 2022.
Under pressure from Wall Street to the Treasury, both of whom have become dependent on cheap borrowing, to start cutting interest rates as quickly as possible once the annualized rate of price growth neared the desired 2% target, the Fed began easing rates in September.
However, this cutting cycle, anticipated by reacceleration of money supply growth starting in January 2024, coupled with broader economic dynamics, has coincided with a reacceleration of price levels, raising questions about the durability of the Fed’s “victory,” particularly in conjunction with some of the economic policies being floated by Donald Trump for his second term that could lead to massive upward pressures on prices.
Indeed, recent data suggests the price level is inching back up. In October, the CPI rose to 2.6% annually, marking the first increase in headline inflation in seven months. Meanwhile, core inflation—a measure that excludes volatile food and energy prices—has risen at an annualized pace of 3.4% to 3.8% for three consecutive months, signaling persistent underlying price pressures.
Some of these pressures stem from the same structural issues that drove price increases during the pandemic years. Housing costs, which contributed significantly to the recent uptick, remain elevated despite softening rents for new leases. Median home prices have surged 30% since early 2020, leaving Americans to shoulder higher mortgage payments and rents. Food and energy prices have also remained stubbornly high, with egg prices nearly doubling since pre-pandemic times and gasoline costs up 16%.
This resurgence underscores a critical reality: while the pace of the increase of the price level may have “slowed,” prices remain substantially higher than their pre-pandemic levels. Consumers, therefore, continue to feel the squeeze, even as wage growth outpaces inflation. This is a dynamic that Federal Reserve Chair Jerome Powell has cautiously acknowledged as insufficient to reignite significant inflationary pressures on its own, though a wage-price dynamic is far from out of the question as the labor market remains historically tight in the face of large generational turnover.
Precedent, particularly that of the 1970s, demonstrates that loosening monetary policy before the price level is firmly anchored can lead to renewed price surges. October’s data aligns with these warnings, showing how even modest economic shifts can push the price level higher.
Looking ahead, fiscal and political developments could add fuel to the fire. Donald Trump’s proposals, including mass deportations and a sharp increase in import tariffs, would likely exacerbate price pressures.
Tariffs act as a tax on imported goods, raising costs for businesses and consumers alike—while at the same time increasing the market power, i.e. the pricing power, of favored domestic firms. During Trump’s first term, tariffs on Chinese imports contributed to higher consumer prices across sectors and a fat bailout for the farms affected by Beijing’s retaliatory tariffs. A broader application of such measures could amplify price pressures, especially in a global economy still grappling with supply chain vulnerabilities.
Similarly, mass deportations would disrupt labor markets, particularly in sectors like agriculture, construction, and hospitality, which rely heavily on immigrant workers. Labor shortages would drive up wages in these industries, further increasing costs for consumers. The interplay of these policies could push prices up higher and faster, counteracting efforts by the Fed to stabilize the year-on-year increase in the price level.
If these and other policies create additional price pressures, the Fed might be forced to resume rate hikes, confounding market expectations and exacerbating financial vulnerabilities.
While Powell has expressed confidence that measures of favored price indices, such as CPI, will continue to decline, albeit unevenly, he has been seriously wrong before. And with the core inflation indicator already running at an annualized pace far above the Fed’s 2% target, and new upward pressures emerging, the risks of renewed price level increases far in excess of the 2% mark appear significant.
Then there is the elephant in the room: the $2 trillion annual deficits the federal government is facing from now until well into the 2030s, according to the Congressional Budget Office. That money will be printed, diluting the existing stock (actual inflation), and this will be a serious and underlying impetus in the rising price index as each dollar purchases just a little bit less day upon day.
With just the interest on the existing debt already in excess of $1 trillion annually, it seems safe to say that whatever uncertainties there may be about the road ahead the final destination is not looking good.
