After the Biden inflation: What Happened?

Feel free to skip the "Context" section below, and jump to the second part of this post.

 

Context 

I looked at inflation back in June of '24 in The Biden Inflation: What Happened? This is the graph I showed at that time:

Graph #1: June 2019 to January 2025

The blue line shows CPI inflation; each blue dot on the line pinpoints one month's data. In the early months of 2021, the path of inflation turns upward and crosses the solid red line. The next blue dot after the lines cross represents March 2021, the month that Jerome Powell warned us inflation was coming.

The gray line shows the Federal Funds Rate, the interest rate that the Federal Reserve raises when they want to fight inflation and lowers when they want to encourage jobs and growth. The Federal Funds Rate runs flat and low, near the zero level, from early 2020 to early 2022. The first increase came in March 2022, a full year after Powell's March 2021 inflation warning.

CPI inflation in March 2022 was 8.5 percent, as the blue line indicates.

Three months later, in June 2022, CPI inflation peaked at 9 percent, and by July inflation was coming down. The fall in the rate of inflation, once it finally started, was about as rapid as the increase. (Unfortunately, it was not prices that were coming down, but only the rate of increase of prices.)

The downtrend of the CPI stopped suddenly in June of 2023 at 3.06 percent. As if it hit a hard surface, the blue line bounced up a little, came down, and then bounced a bit more before there was no more data available. The last blue dot represents April 2024. (The above graph, remember, is from June of that year.)

The red line on the right represents the "hard surface" where the rate of inflation was bouncing. That dashed red line runs just above the 3 percent level. The red line on the left indicates the 2 percent level. It shows the inflation target, the 2 percent annual inflation that the Fed thinks best for our economy. From start-of-data to early 2020, the blue line shows the annual rate of inflation running close to the target level. Inflation then dropped rapidly during the pandemic recession of 2020, but increased rapidly beginning in March 2021 as noted above.

In March of 2022 the Fed began increasing the Federal Funds rate, at a fairly rapid pace. The rate of inflation peaked in June 2022 and started to come down. Inflation stopped coming down a year later, in June 2023. The Federal Funds rate continued increasing until August 2023, when it reached 5.33 percent.

On the graph above, the interest rate (gray) that the Fed uses to keep inflation down continued at the 5.33 level, and the rate of inflation (blue) continued at roughly 3 percent, to end-of-data. Graph #2, below, shows the same datasets, updated thru July (for inflation) and August (for interest) of 2025:

Graph #2: January 2020 to August 2025

The rate of inflation came down from the June 2022 peak until June 2023, when it hit that "hard surface" just above the 3 percent level. With the interest rate running high since August 2023, inflation was not free to increase, but still refused to go below the 3 percent level until mid-2024.

Inflation fluctuated in small steps until March 2024. The Fed, however, was still holding the interest rate high and unchanged at 5.33 percent, and at that point the forces of inflation seemed to give up. The blue line shows a gradual but persistent, almost purposeful decline from March to September of 2024.

The Fed evidently noticed this fall of inflation to slightly below the 2.5 percent level, and relaxed ever so slightly: They reduced the interest rate a little in September 2024 and again in October. 

In October, the rate of inflation started rising again.

In every month from September 2024 to January 2025, the Federal Reserve reduced the interest rate. And every month from October 2024 to January 2025, the rate of inflation increased.

The Fed acted responsibly. They did not reduce the interest rate until inflation went below the 3 percent level. And they stopped reducing the interest rate when the rising inflation reached 3 percent. From January thru August of 2025 the Fed has held the interest rate steady at 4.33 percent, waiting for inflation to return to the 2 percent target level.

The Fed thought they had things under control. The economy didn't cooperate.

The Fed last reduced the interest rate in January 2025. They held it steady from February to August, where the data ends.

During this second phase of high-but-steady interest rates, the rate of inflation 

• fell from 3 percent in January 2025 to below 2.5 percent in March; 
• stabilized near 2.4 percent from March 2025 to May; and then
• rose in June and July, near the 2.75 percent rate and approaching 3 percent, again.

Before reducing the interest rate further, the Fed was waiting to see what inflation would do. Between March and September 2024, the Fed waited 5 months, with inflation falling every month, and did not reduce the interest rate until inflation went below 3 percent and continued going down.

In September 2024 the Fed was satisfied that they had inflation under control, and reduced the interest rate. The next month, inflation increased. The Fed remained confident, and continued reducing the interest rate in small steps. But inflation continued rising until January 2025 when it again reached 3 percent. Since January, the Fed has not changed the rate of interest.

 

That "hard surface" is the inflation target that our economy wants.

The Federal Reserve still trusts its 2 percent inflation target and still wants to see the rate of inflation running close to that level.

But the economy has a mind of its own, and wants a 3 percent inflation target, or perhaps 3.3 percent. The rate of inflation hit that hard surface in June 2023, stayed there until July 2024, and even now is not far from 3 percent.

There is a contest going on, a struggle between the Federal Reserve and economic forces; a contest between the Fed's 2 percent target, and the 3 percent target that our economy seems to want. How could this have happened?

Do you have too much money? No? Then the problem is not "too much money chasing too few goods." The problem is not demand-pull, but cost-push inflation. You know: the inflation that makes the economy slower rather than faster. The inflation that no one studies; instead they say "there's no such thing."

"Too much money" leads to too much spending, and too much spending pulls prices up. That's not the problem. If we had too much money, people would be saying the economy is great.

Our problem is "not enough money". Everyone knows it but the billionaires. We solve the problem by using credit: by borrowing money: by accumulating debt. The more we rely on credit, the greater is the cost of finance -- and the greater the cost of finance, the more it eats into wages and profits. 

And the more the cost of finance eats into wages and profits, the more we have to increase our reliance on credit. It's not a sustainable situation, and everyone knows it. 

Over time, debt accumulates more rapidly than income, and financial cost grows. I think that's what happened around the time of the pandemic. Before the pandemic, the 2 percent inflation target was working. During the pandemic we did a lot of borrowing. Consumers did, and businesses, and so did government. And now, after the pandemic, our debt-to-income ratios are higher, and our financial costs are higher. 

Before the pandemic, the 2 percent inflation target was still working. But costs increased, so 2 percent isn't enough anymore. That's why the endogenous 3 percent inflation target arose. And that higher target is the reason the Fed has such difficulty getting inflation down to 2 percent.

It's more than 2 years, now. Inflation stopped falling in June 2023. The Fed's continuing reliance on its 2 percent target -- and its attempt to push inflation below the endogenous 3 percent target -- has slowed and weakened our economy. The recent large downward revision in job growth may be just one of the consequences.