When it comes to inflation, the U.S. has been living in a fool’s paradise. Inflation — that is, the rise in the general level of prices — has been a fact of economic life, averaging 3.3% annually since 1914. But from 2009 to 2020, the consumer price index rose just 2.1% a year. We got used to inflation one-third lower than the historical norm, which is why post-COVID prices have been such a shock.
The best way to drive inflation out of the system is to hike short-term interest rates. Rates had been sitting close to zero from 2009 to 2022, with the exception of a brief period around 2018. Then the Federal Reserve started to increase rates relentlessly — to more than 5% in just two and a half years. The antidote worked, up to a point. Inflation dropped from 8% in 2022 to 4.1% in 2023 and to 2.9% last year. But the Fed’s target is 2%, and it’s having a tough time getting there.
