37 months and counting: U.S. faces longest inflation battle in 3 decades

The U.S. economy is mired in the longest bout of high inflation in more than three decades.

According to Charlie Bilello, the chief market strategist at Creative Planning, April marked the 37th consecutive month that the U.S. Consumer Price Index (CPI) was above 3%—the longest stretch since the late 1980s.

The CPI increased at a 3.4% annual rate in April, led by higher energy, motor vehicle insurance, and healthcare costs. Although a major drop compared to the 9.1% peak from 2022, inflation remains well above the Fed's target.

“The war against inflation is far from over,” Bilello wrote in his blog.

That's why the Fed has shut the door on the possibility of imminent rate cuts, with Chairman Jerome Powell admitting that progress on inflation has been slower than expected.

“This is a big shift from dovish rhetoric late last year,” when the Fed was forecasting multiple rate cuts for 2024, Bilello wrote. “And as a result, we’ve seen a huge shift in markets.”

Although many economists disagree with the Fed’s inflation-targeting strategy, it’s clear that policymakers won’t abandon it anytime soon.

Hong long until 2%?

The Fed has come a long way in just a few years.

In 2021, central bankers tried to convince Americans that inflation was only “transitory” and wouldn’t disrupt their lives. By the middle of the following year, it was clear that they were wrong.

Although the Fed has made significant progress in reducing inflation since then, its own researchers say it will take years for prices to reach target levels.

Randal Verbrugge, a senior research economist at the Cleveland Fed, recently predicted that headline inflation would only fall to 2.7% by the middle of 2025. His modeling suggests the Fed will not achieve its 2% target until 2027.

“If the [external] 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 wrote.

Although the Fed’s top brass isn’t as pessimistic, they, too, have admitted that their target is a long way off. “The recent data lead me to believe this will take more time than previously thought” to reach 2%, said Boston Fed President Susan Collins.

Fed officials will provide an update on their interest rate outlet at their upcoming FOMC meeting in June by way of their now infamous “dot plot” forecasts.

The markets are pricing in a 99.9% chance that the Fed will hold rates steady at its upcoming meeting.