October 10, 2025

The Federal Reserve targets inflation at 2.0%.  In the past 12 months it has risen 2.9%.  Furthermore, the Fed does not anticipate it returning to 2.0% until 2028.  At any other point in time the Fed would maintain a restrictive policy stance in an effort to quickly reduce inflation to the desired 2.0% mark.  But not today.  The Fed cut rates in September and fully intends to do so again in October and December, presumably to head off any further weakness in the labor market.  It has blinked, and seems very willing to tolerate a higher-than-desired 2.0% pace for the foreseeable future.  In our opinion, its behavior is undermining confidence in the central bank.

Current and future rates of inflation are unacceptably high.  That is bad, but the real problem is the cumulative impact of higher-than-desired inflation for the past five years. When inflation first began to climb in 2021 the Fed tried to convince us that we should not worry about it because it was “temporary”.  To an economist  “temporary”  means that prices go up, but eventually decline and return to a level not far from where they started.  That did not happen.  Prices rose, but never fell.  They simply rose more slowly.  As a result, the level of prices for many goods that consumers purchase regularlly have increased permanently.  The price increases were not temporary and the problem has gotten worse in each of the past five years.

In today’s world wealthier Americans have seen substantial gains in the value of their stock holdings and the price of their home.  Their net worth is at a record high level.  The run-up in inflation is not particularly troublesome for them.  But try telling that story to a lower income earning family that has seen the prices of everything they buy — from rent, to food, to the cost of owning an automobile  —  rise far more quickly than their income.  Their purchasing power has been declining for years.  No wonder all measures of consumer sentiment are near record low levels.

The core personal consumption expenditures deflator has risen 2.9% in the past year.  It has risen at unacceptably rapid rates for years.  It climbed 5.2% in 2021, 5.0% in 2022, 3.1% in 2023, 3.0% in 2024, and is expected to increase 2.9% in 2025.  The Fed told us that the run-up inflation after the recession was going to be “temporary”.  That should mean that prices go up but eventually come back down.  That did not happen.  Prices rose and then rose more slowly.  They never declined. The rate of change has slowed, but prices never fell.  As a result, the prices of many consumer goods have risen dramatically in the past five years.  Lower income families are having to tighten their belts and make hard choices about which bills to pay.

The biggest item in any consumer’s budget is rent which accounts for about one-third of any family’s spending every month.  The red line in the chart below is the rent component of the CPI if it rose at the desired 2.0% pace since the end of the recession.  The blue line is the actual level of the rent component.  Rents today are 16% higher than they would have been had they increased at the Fed’s desired 2.0% pace in the past five years.

The chart for food prices looks virtually identical.  Those prices are 17% higher than they should be.  Within the total food category egg prices are more than double where they should be.  Beef prices are 47% higher.  Chicken prices 22%.  Coffee 97%.  Go to the grocery store with $100 in your pocket today and  you are likely to walk out with only two bags of groceries.  A couple of years ago that same $100 would have bought three bags of groceries or more.  Consumer purchasing power is being eroded by inflation.

Car repairs are 52% higher than they would be if they had risen at the Fed’s desired 2.0% pace.  Car prices have climbed sharply and vehicles have become far more complex.  There is no such thing as a fender bender any more.  Car insurance is 40% higher than where it should be.  Owning a car is becoming increasingly expensive.

The problem is that rent, food, and the cost of operating a vehicle are all necessities.  You have to pay the rent.  You have to eat.  You need a car to get to work.  It is hard to escape these higher prices, especially for lower income families.  They now buy store brand products rather than name brands.  They choose between paying the rent and buying food for the kids.  They may make that 10-year-old clunker last another couple of years.  For those families life has gotten far more difficult in the past several years.  Many have given up on the dream of ever owning their own home.  Student loan payments have become onerous for many.

At the same time higher income families are doing just fine.  Their income has been rising and, given the dramatic increase in stock prices and the breathtaking appreciation in the value of the family home, their net worth is at a record high level.  If something should happen and the breadwinner loses his or her job, their net worth acts as a cushion against the temporary job loss, so why cut back on spending?

Taking it all together, consumer spending has been climbing  at a moderate pace for the past couple of years and should continue to increase by about 2.0% next year  But the overall growth rate in spending masks a wide divergence in the behavior of high income families and those at the low end.

Against this background the Fed’s action of cutting rates and perhaps stimulating GDP growth and making the inflation problem worse seems inappropriate.  Whether Fed officials genuinely fear substantial weakening in the labor market, or their willingness to ease has been influenced by the intense pressure from Trump to lower rates, is unclear.  But given everything said above, cutting rates now seems inappropriate and is further widening the gap between the haves and the have nots.  In our opinion the Fed should stay the course, get inflation back to 2.0% (or even lower), and then cut rates.  Unfortunately, this Fed is not going to do that.

Stephen Slifer

NumberNomics

Charleston, S.C>