Inflation will take years to fall to 2% target, according to Cleveland Fed model

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Joyce Fleming and Greg Piazza discuss being forced to return to the workforce due to rising costs.

Inflation in the U.S. is unlikely to fall to the Federal Reserve's 2% target for at least three more years, according to a new report published by the Cleveland Federal Reserve Bank. 

The findings suggest the pandemic-era shocks that stoked high inflation, including supply chain disruptions and rabid consumer demand, have been resolved, but that there are other «very persistent» forces fueling price pressures within the economy.

«There are both theoretical and empirical reasons to think that, absent X factors such as continued favorable supply shocks or strong productivity gains, the last half-mile could well take several years,» Cleveland Fed economist Randal Verbrugge wrote in the report. 

That suggests inflation will not return to pre-pandemic levels until mid-2027 at the earliest.

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Customers shop at a supermarket in Foster City, California, on Sept. 13, 2023. (Photo by Li Jianguo/Xinhua via Getty Images / Getty Images)

Verbrugge differentiates between the two sources of inflation: extrinsic, meaning external shocks like production costs or the overheated labor market, and intrinsic, meaning internal shocks like wage-setting and price-setting decisions and the way that inflation expectations are formed.

The resolution of supply chain issues contributed to the notable decline in inflation last year. But that progress appears to have run its course, and inflation's path seems like it will be «governed by its intrinsic dynamics» moving forward. Those forces include wage growth and corporations raising or lowering their prices.

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