Key Takeaways
- Inflation is set to run above the Federal Reserve’s 2% annual target for a fifth year if projections for 2025 hold true.
- High inflation has roiled the economy and household budgets since the U.S. began to recover from the COVID-19 pandemic in 2021.
- Inflation has fallen from its peak in 2022 when COVID’s disruption of global supply chains drove inflation to four-decade highs.
- Problems with global supply chains were mainly responsible for recent inflation, and experts have warned tariffs imposed by incoming President Donald Trump could drive prices up more.
The post-pandemic burst of high inflation, once called “transitory” by Federal Reserve officials, is poised to enter its fifth calendar year.
If economists’ forecasts hold true, official inflation reports will show that consumer price increases accelerated in December, carrying inflationary momentum into the new year. Fed officials expect their preferred inflation measure to average 2.5% in 2025, which would mark half a decade of above-target inflation.
The dubious milestone highlights the profound impact that the surge of inflation that began in 2021 has made on household budgets, the U.S. economy, and even presidential politics. An item priced at $100 in February 2020 would cost $118 in November if it followed the PCE inflation trend. That’s compared to about $108 if inflation had run at 2%, similar to the typical pre-pandemic rate.
How Did Inflation Get Here?
Inflation surged starting in 2021 as the economy began to recover from the onset of the pandemic, and picked up speed in 2022 as the shock of COVID-19 worked its way through the complex supply chains of the international economy.
Consumers, many flush with cash from pandemic relief programs, encountered shortages of stuff they wanted to buy, and businesses responded by raising prices. (Because the burst of inflation happened almost all over the world, many economists blame the supply chain snarls more than the stimulus checks.)
The worst of inflation was relatively short-lived. Inflation has fallen dramatically since its peak in 2022, when annual core PCE inflation got as high as 5.6%. But despite having hiked interest rates to a two-decade high before gradually cutting in 2024, Fed officials have struggled to bring inflation fully under control. High interest rates are meant to discourage borrowing and spending throughout the economy, quenching inflation’s fires.
The stubbornness of the “last mile” of high inflation is still roiling the economy. Investor expectations that inflation will remain above target have helped push up yields on 10-year treasuries, which has kept mortgage rates high, frustrating would-be homebuyers and freezing over the housing market.
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