This month marks five years since the worst U.S. inflation outbreak in a generation, a defining economic shock that continues to shape policy debates, sway national politics and frustrate Federal Reserve officials trying to restore the pace of price increases to their 2% target after a monumental miss.
When nose-diving inflation at the start of the COVID-19 pandemic touched off concerns of a dangerous downward spiral in wages and prices, it was actually considered a good sign when prices across a variety of gauges began rising by more than 2% annually in March 2021. Fed officials even planned to encourage the emerging trend with continued low interest rates.
"We want inflation at 2%, and not on a transitory basis," Fed Chair Jerome Powell said at a press conference that month in a be-careful-what-you-wish-for statement that would haunt the central bank.
Central bankers said they expected inflation to remain above their target that year, but not by much, and that they would wait on any effort to slow the economy with interest rate hikes until the increase proved durable.
But the pace kept accelerating.
At year's end, the Personal Consumption Expenditures price index the Fed uses to set its target was rising at more than a 6% annual rate, triple its target. It did not peak until passing 7% in June 2022, with the Fed at that point scrambling to catch up with steep, rapid-fire rate hikes.
Inflation as measured by the separate Consumer Price Index topped 9% that month, the fastest pace since 1981, when the Fed was in the process of taming an even worse unmooring of prices.
The scars – political, financial and economic – won't fade quickly.
Here's a look at what's transpired with inflation in the past half-decade:
"People hate inflation" was a popular mantra among Fed officials as they pivoted towards a historically rapid series of rate hikes in 2022 to control inflation, even though they knew tighter credit would cause hardship by pushing new homes or cars out of reach for some consumers, given the financing costs. Monetary policy works in part by discouraging demand through raising the cost of credit, with weaker demand easing the pressure to raise prices.
An even larger risk was a "hard landing" from inflation in the form of rising unemployment or even a recession. That didn't happen this time around, even though many top economists thought it was inevitable.
It's easy to see why Fed officials were willing to take those sorts of risks, however. Inflation acts as a tax and leaves everyone worse off. Over the past six years, in fact, inflation has offset most of the increases in personal income, hitting hardest among the less well-off. A dollar today is equivalent to about 79 cents in January 2020.
Economists sometimes say the solution to inflation is more inflation, since eventually high prices will kill demand. But for the Fed, the solution to inflation is higher interest rates. By raising their short-term policy rate, a range of other borrowing costs goes up, particularly home mortgages.
The Fed's rate hikes starting in 2022 hit at an unusual time. Loose central bank policy that had taken hold during the 2007-to-2009 financial crisis had conditioned U.S. consumers over more than a decade to very cheap mortgages – cheaper than at any time in recent history.
The abrupt shift back to what are historically more normal financing costs has been a shock. Expectations play a large role in economics and politics, and the public is still adjusting to the fact that "cheap money" is gone for now.
A mortgage rate rising from below 3% to more than 6% adds hundreds of dollars to monthly payments and can be frustrating for those who find their incomes can no longer support a home purchase.
As the Fed meets this week, expected to hold interest rates steady, the U.S. is still confronting the aftermath of what economists came to regard as a collision between supply chains constrained by the pandemic and demand unleashed by trillions of dollars of COVID-era federal spending.
At the same time, the Fed's preferred inflation measure remains about a point above target at roughly 3%, monetary policy remains somewhat tight, and a new price shock may be developing with oil prices above $100 a barrel due to the U.S.- and Israel-led war with Iran and gas prices topping $3.70, about 25% higher since hostilities began on Feb. 28.
President Donald Trump, who used anger over inflation and high prices as a powerful reelection campaign point in 2024, is struggling with continued voter concerns around "affordability," with food prices still rising, home mortgage rates stuck above 6%, and healthcare and other major costs stressing family budgets.
He promised prices would fall. They didn't. They rarely do.
