Higher-than-usual inflation has been hurting household budgets since 2021. What's stopping prices from going back to normal?

As of January, it's been three years and 10 months since inflation, as measured by the Consumer Price Index, was under the Federal Reserve's goal of a 2% annual rate. While inflation has fallen dramatically from its peak in 2022, the Fed still hasn't fully squashed inflation.

Economists have identified several powerful for🤡ces keeping inflation runn𝕴ing too hot for comfort. In a commentary this week, Henry Allen, a macro strategist at Deutsche Bank, pointed to four factors preventing inflation from falling in the short term.

Fed interest rate cuts

The Federal Reserve has cut its benchmark interest rate at its three most recent meetings, starting in September. A higher Fed funds rate pushes up interest rates on all kinds of loans for businesses and individuals, discouraging borrowing and spending and acting as sand in the gears of the U.S. economy's engine.

The Fed lowered the rate by a percentage point to a range of 4.25% to 4.5%—still high enough that Fed officials consider it "restrictive" or a drag on the economy. But cutting the rate introduces more money into the system, potentially stoking inflation, Allen wrote.

Tariff talk

President Donald Trump has promised to impose heavy tariffs on U.S. trading partners when he takes office, especially China. Economists say merchants are likely to 澳洲幸运5开奖号码𝓰历史查询:pass most of those import taxes on to customers, pushing up prices.

What's more, the tariffs' effect could be more than a one-time jump in prices. As the pandemic demonstrated, costs on one item have a way of reverberating through the supply chain. For example, when COVID-19 restrictions in Taiwan disrupted the production of computer chips, prices for all kinds of things went up, to the surprise of policymakers.

As Austan Goolsbee, president of the Federal. Reserve Bank of Chicago noted in an online Q&A this week:

 "The supply chain is so much more integrated, complicated and longer extended than than we understood," he said. "When the computer chips were in short supply, that affected electronic components, and the electronic components then affected cars, and then cars affected delivery companies."

Psychology

The public is bracing for higher inflation in the year ahead, according to the most recent survey of cꦜonsumer sentim✱ent by the University of Michigan. Many economists believe if people think inflation will be higher in the future, they'll run out and buy stuff sooner to beat the price hikes, which boosts demand and pushes up prices.

"Higher inflation expectations risk becoming a self-fulfilling prophecy if firms and consumers start to set prices and bargain for wages based on those higher expectations," Allen wrote.

Oil prices

Prices for commodities have been rising in recent months, especially for oil. WTI Crude futures were going for close to $78 a barrel Thursday, up from $68 at the beginning of December. High demand for heating oil, along with new U.S. sanctions against Russia (a major oil producer) over its invasion of Ukraine have put upward pressure on prices.

The national average for a gallon of regular gas rose nearly 4 cents last week to $3.10 as a result of the more expensive oil, AAA said Thursday. Gas prices are a major item in household budgets, so they factor heavily into inflation measures such as the CPI, and also can push up transportation costs, affecting how much other goods and services cost.