Cooling down is just an illusion? Analyst delivers harsh warning: 2% is history, high inflation will be the lingering "new normal"

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The U.S. inflation rate has deviated from the Federal Reserve’s target for several consecutive years. Although the latest data show a decline, analysts warn that structural factors may make the era of low inflation a thing of the past, putting sustained pressure on monetary policy credibility and household finances.

The U.S. Bureau of Labor Statistics announced on Tuesday that the Consumer Price Index (CPI) for June fell 0.4% month-on-month and increased 3.5% year-on-year, below the market expectation of 3.8%, and a clear drop from the previous value of 4.2%.

However, this data is far from cheerful—the average year-on-year value over the previous three months reached 3.8%, nearly twice the Fed’s 2% target. Moreover, June’s decrease was largely due to a drop in gasoline prices, which is not a solid trend.

Minneapolis Federal Reserve President Neel Kashkari recently admitted that the public has endured inflation for over five years, and every trip to the supermarket feels "more and more unaffordable."

The persistently high inflation has already caused real harm to actual household incomes. According to Bloomberg data, from April to June this year, inflation-adjusted average hourly wages fell a total of 0.33%, whereas this figure has averaged positive growth over the past 20 years.

At the same time, the unpredictability of inflation is equally concerning—uncertainty in income, much like volatility in financial asset returns, erodes actual value.

Low inflation may be a historical exception rather than the norm

For most of the 20th century, an inflation rate of 3% to 4% was regarded as a successful hallmark of monetary policy.

In the 2010s, inflation rates long below target and close to zero actually worried policymakers that monetary policy space was limited.

Many economists at the time believed that 4% inflation was better than 2%, as higher inflation provided more room for monetary policy; businesses didn’t mind either, since in times of high inflation, not raising wages allowed labor costs to be lowered implicitly, which was milder than layoffs during economic downturns.

However, the low inflation environment of the 2010s may precisely have resulted from the combined deflationary pressures of technological progress and globalization—conditions that may not be easily replicated.

Meanwhile, structural trends such as population aging may continue to push the inflation center higher. Once inflation expectations are formed—whether low or high—they are difficult to reverse and will deeply embed themselves into wage negotiations and consumption decisions.

The cost of high inflation is far beyond expectations

The experiences of recent years are reshaping economists’ perceptions of inflation. When the inflation rate exceeds 2.5%, its risks appear much greater than previously estimated.

Unlike unemployment, inflation hits everyone at the same time, making its political and social consequences especially profound.

A higher average rate of inflation also means greater volatility, and uncertainty itself is destructive.

Moreover, persistently high inflation drives up interest rates and increases their volatility, which raises capital costs and injects more risk into financial markets. During economic booms, 4% inflation raises the threshold for wage growth, making it more difficult for workers to improve their real purchasing power.

The Federal Reserve’s credibility faces a test

The Federal Reserve has continually promised that inflation will return to the 2% target, but has yet to deliver. Although shocks from the pandemic, geopolitical conflicts, tariffs, and other policy events objectively exist, these external disturbances are normal realities of the economy and cannot explain a long-term deviation from target.

Some viewpoints hope for stable oil prices or AI-driven productivity improvements to help prices ease, but such expectations are increasingly wishful thinking.

If the Fed continuously fails to meet the 2% target, its monetary policy credibility will be undermined, weakening its ability to manage the economy in the future. For other policymakers, persistently high inflation also makes risk management more complex.

Looking back, many economists once thought surpassing the Fed’s 2% inflation target might be preferable to undershooting it, and even advocated raising the target to 3%-4%. Now, the value of that low inflation era may only be truly appreciated once it is lost.

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