Dec 18, 2023 - Economy

Why inflation's "last mile" might not be so hard after all

Illustration of a running track with one lane splitting off into a new direction.

Illustration: Annelise Capossela/Axios

Top policymakers warned that the "last mile" of getting inflation back to 2% would be most challenging.

  • But now, the finish line is in sight and disinflation looks to still have momentum to carry through.

Why it matters: Beating inflation in America has not become more difficult as the fight winds down.

  • Rather, supply-side rebounds and strong productivity gains have surprised top economists, who expected economic pain might be necessary to get inflation all the way back to the sweet spot central bankers aim for.

Flashback: This summer, the Bank for International Settlements — known as the central bank for central banks — warned that slowing inflation owed much to repairing supply chains and cheaper commodity prices.

  • The economists warned that "the last mile to price stability may be the most challenging" largely due to tight labor markets and strong inflation in the services sector — a combination that might fuel a hard-to-tame wage-price spiral.

Where it stands: That scenario hasn't played out, at least not in the U.S.

  • Labor markets have loosened up, helped by a larger supply of workers who came off the sidelines. Stronger wage gains have been paired with strong productivity growth.

By the numbers: That's been met with a more benign inflation environment. If forecasters are correct, the Personal Consumption Expenditures Index — the Fed's preferred inflation gauge — might fall to 2.8% in the 12 months through November.

  • Excluding food and energy prices, it is on track to slide closer to 3.4%.
  • The narrative "does not make a great deal of sense. There is plenty of evidence that the last mile of inflation is a sprint, not a slog," UBS economist Paul Donovan wrote in a note earlier this month.

What they're saying: Top White House economist Lael Brainard told reporters Friday that she understood the argument months ago "when there was still a lot of murkiness in the data and the inflation trajectory."

  • "I don't get that argument today," Brainard said. "We will continue to see ongoing disinflation and have every reason to anticipate that taking place in an environment of solid growth and good employment."
  • "There's still room to run" on the supply side, Brainard said, adding that the corporations seeing cheaper input costs from supply chain improvements will pass those along to the consumer.
  • If she's right, it would be great news for the Biden administration, as it would imply continued painless disinflation heading into next year's elections.

The intrigue: Federal Reserve chair Jerome Powell said last week that inflation continues to come down alongside a more balanced job market.

  • "It's so far so good, although we kind of assume that it will get harder from here. But so far it hasn't," Powell told reporters at a press conference, in response to a question about whether "the last mile" will be the hardest.

The other side: In Europe, the "last mile" narrative has stuck.

  • As recently as last month, a top European Central Bank policymaker warned at the St. Louis Fed that "quick wins of the disinflation process" were over.
  • "Disinflation really does seem like a long-distance race. When the runner enters the last mile, the hardest work begins," Isabel Schnabel, an ECB executive board member said. "The disinflation process during the last mile will be more uncertain, slower and bumpier."
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