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Summary:

US inflation surged starting in spring 2021, with Consumer Price Index (CPI) inflation reaching a 40-year high of 9 percent in mid-2022. Together with improving supply-chain conditions, policy tightening by the Fed decreased inflation to within 1 to 2 percentage points of its 2 percent target by late 2023 without a significant increase in unemployment. However, concerns have been raised that the last mile of disinflation to reduce inflation consistently to its 2 percent target will be more arduous than the previous miles. Close examination of such concerns indicates that they do not receive compelling support. Because the last mile is likely not significantly more arduous than the rest, it is unlikely that the Fed needs to exert extraordinary effort in terms of additional policy tightening as inflation nears its target. Such tightening unnecessarily increases the risk of a "hard landing."

Key findings:

1. The notion that the last mile of disinflation is more arduous than the previous miles does not receive compelling support.
2. It is unlikely that the Fed needs to exert extraordinary effort in terms of additional policy tightening to bring inflation down the final 1 to 2 percentage points to consistently reach its 2 percent target; such tightening unnecessarily increases the risk of a "hard landing."

Center Affiliation: Center for Quantitative Economic Research

JEL classification: E31, E52, E61

Key words: monetary policy, disinflation, Phillips curve, price stickiness, inflation expectations, soft landing

https://doi.org/10.29338/ph2024-01