Federal Reserve’s ‘Last Mile’ of Inflation Fight Will Be No Cakewalk

All eyes this week will be on the release of the US consumer price index for August on Wednesday, especially after the sharp reduction in inflation from 9.1% in June 2022 to just more than 3% in July. Markets are looking for the CPI prints in the coming months to solidify the return of inflation closer to the Federal Reserve’s target of 2%, thereby clearing the way for the world’s most powerful central bank to translate this month’s highly anticipated pause in interest-rate increases into the end of the hiking cycle and to cut rates starting as early as the start of next year. The reality of this “last mile” in the current inflation battle may prove, unfortunately, to be more complicated.

In simplified terms, the strong disinflation of 2023 has been led by the goods sector with certain items, such as energy, experiencing sharp outright price declines. Its continuation is premised on the more stubborn items, such as rent, coming down and, more generally, durably subdued core price dynamics re-anchoring a low and stable inflation environment as better-behaved services join the disinflation of goods.