Key insights
- Persistent inflation exceeding the Fed's 2% target for 62 consecutive months, with recent data indicating further increases, puts significant pressure on the Federal Reserve. This suggests a higher-for-longer interest rate environment or potential hikes, leading to increased borrowing costs for consumers and businesses. Traders are now pricing in rate hikes this year, signaling a bearish outlook for equities due to tighter monetary policy.
%3Amax_bytes(150000)%3Astrip_icc()%2FGettyImages-2275859557-4a9e835d6e04476ea834efe252781a0f.jpg&w=3840&q=75)
Get personalized, AI-powered answers built on 27+ years of trusted expertise.
A key inflation rate has likely exceeded the Federal Reserve's target for more than five years in a row, and it's dragging on the economy.
The Fed's preferred inflation measure has remained above the central bank's 2% annual target for 62 months, and a report on Wednesday indicated it likely rose again in May.1
The Consumer Price Index, excluding energy, rose 2.9% over the year in May.2 The Fed uses a different inflation gauge called core Personal Consumption Expenditures as its benchmark, but those two rates typically move in the same direction and stay within a few tenths of a percentage point of one another.
Inflation has been exacerbated by disruptions to the global and U.S. economies since 2021. First, the pandemic tangled supply chains; then, in 2022, the Ukraine war snarled them further; then tariffs raised import prices. Now, the Iran war is pushing up fuel costs amid signs that those price increases are contagious, spilling over into other parts of the economy.
The inflation hot streak has been far shorter than in previous eras. Core CPI inflation was above 2% for 33 years and 3 months between 1966 and 1999.
However, the current run of above-target inflation is the longest since the Fed officially adopted its 2% annual target in 2012.3 The Federal Reserve adopted the benchmark to be more transparent about how they set interest rates.
The longer inflation stays above 2%, the greater the pressure on the Federal Reserve to keep its key interest rate higher for longer, or even raise it, to lower inflation by pushing up borrowing costs across all kinds of loans.
Because of persistent inflation, traders now expect the central bank to raise its key interest rate this year. That means households will have to contend with even higher borrowing costs as they navigate higher prices, particularly at the gas pump.
"The Fed’s priority right now remains inflation, and we expect them to ditch their easing bias at the FOMC meeting next week," wrote Scott Anderson, chief U.S. economist at BMO Capital Markets Economic Research. "The potential for future rate hikes is still very much on the table."
Get personalized, AI-powered answers built on 27+ years of trusted expertise.