Inflation under the Biden administration raised the Consumer Price Index by 20% (cumulative). The inflation rate has fallen significantly (currently at 3.0%), but overall prices have not fallen to pre-2021 levels. That would probably require a significant economic slowdown or recession. Some prices have reversed. Recently, oil prices have declined, and the cost of fuel has followed, a result of significant increases in oil production. The rate of price increases has slowed, but the level of prices is still rising. Overall, the loss of purchasing power has not been restored by increases in real incomes.

Table 1 shows reported average price increases for 984 small firms surveyed in October. While over half did not change prices recently, 43% did. Thirty-one percent raised their selling prices, and 12% reduced them. Over 20% raised their average selling prices by 5% or more. Getting our inflation rate down to the Fed’s target of 2% in that environment is tough.

Table 2 hints at where the inflation might have come from – retailers, who are supplied by wholesalers, most frequently reported raising selling prices (46%). The finance sector product prices depend on interest rates, which have been rising despite the Fed’s policy rate cuts. Agriculture firms have been whipsawed by international politics. China walked away from soybeans, producing a scramble to find alternative markets. The non-professional services sector increased prices about as frequently as manufacturers. Labor shortages impacted both industries, skilled for manufacturers, and all skill levels for services.

Inflation is stubbornly too high, 3% vs the Fed target of 2%. But even at 2% consumers still lose purchasing power each year, so their income must rise by as much to stay even. The obvious policy response is to raise interest rates and reduce spending to soften prices. However, the Fed has been cutting its policy rate, and market interest rates have risen. Meanwhile, economic growth has been strong on the real side. GDP growth is now estimated to be close to 4% in real terms.  A lot of the growth has been powered by AI investment spending and strong consumer spending by higher income consumers powered by a stock market producing massive capital gains. Spread over all of this is a historically high level of uncertainty. The bottom line is that inflation is not likely to be reduced in the near future, but the economy will do well.