Can Inflation Be Reversed and Reach the 2% Fed Target?

Key takeaways

• Headline inflation is down to 4% in the U.S., meaning disinflation is happening
• No clue yet on when inflation will hit the Fed’s 2% target, or if it can be done without further harm to the U.S. economy
• U.S. Treasury Secretary Janet Yellen said consumer spending was a risk to core inflation coming down

Inflation: you’re probably sick of hearing about it and wondering when we’ll be done with all of this nonsense. Well, the good news is that inflation is only double the Fed’s 2% target at the moment, but bringing it down might be trickier than earlier in the journey as consumer spending and jobs remain resilient. Keep reading.

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Can inflation be reversed?

The good news is yes, disinflation can happen and in the U.S., we’re seeing it right now. May’s CPI data showed headline inflation fell to 4%, a sharp drop from April’s 4.9% figure, while core inflation fell to 5.3% from 5.5%.

When inflation hit 9.1% last summer, the Fed had already embarked on its biggest monetary tightening process in decades. In theory, higher interest rates limit businesses and household spending and cool inflation but risk a recession.

The June meeting was the first time the Fed decided to pause its hikes in nearly a year, though Fed chair Jerome Powell has indicated more rate rises are on the way.

Could the Fed hit its 2% target soon?

The Fed has a delicate balancing act to figure out how to hit the Goldilocks zone and reach the ‘soft landing’ it’s looking for. Putting interest rates up much higher could further impact the already downtrodden regional banking sector, which had a crisis in March, and push up unemployment rates.

Too-low interest rates could cause inflation to accelerate as households get used to higher prices and continue spending. That’s why core inflation coming down at lower levels than headline inflation is a bit of a concern, which U.S. Treasury Secretary Janet Yellen pointed out last week. “We probably need to see some slowdown in spending in order to get inflation under control”, she commented.

The bottom line

Inflation in the U.S. has been a little like weight loss — the first few inflation percentage points came off quickly, but the last few might be hard to shift. Consumer spending will be of concern to the Fed going forward, but on the whole, things are looking positive — especially compared to other developed economies.

Inflation has been the bane of the Fed’s existence for a year and a half now, but there are ways to build wealth when the economy is turbulent. One of them is with Q.ai’s Inflation Protection Kit, which includes inflation-busting assets and uses a sophisticated AI to help monitor their progress, predict weekly outcomes and automatically handle the heavy lifting for you to help you stay ahead of the curve.

Download Q.ai today for access to AI-powered investment strategies.