Cleveland Fed model suggests inflation may need years to return to 2%

A model developed by Cleveland Fed researchers suggests that if the extrinsic forces that have been pushing inflation down have run their course, it may take several years for inflation to return to the Federal Open Market Committee’s 2 percent target.

According to a new Cleveland Fed report, the model suggests that inflation now appears to be governed by intrinsic forces rather than extrinsic “X factors” including supply chain constraints, which returned to normal levels in the fourth quarter of 2023.

The model, which has proven competitive with hard-to-beat forecasting models, suggests inflation has high intrinsic persistence. It predicts that trimmed-mean PCE inflation will move down gradually, reaching 2.7 percent by the second quarter of 2025, writes Randal Verbrugge, senior research economist at the Cleveland Fed. The model predicts that inflation won’t be near 2 percent until mid-2027.

“There are both theoretical and empirical reasons to think that, absent X factors such as continued favorable supply shocks or strong productivity gains, the last half-mile could well take several years,” Verbrugge writes.

Read the Economic Commentary: Inflation’s Last Half Mile: Higher for Longer?

More on inflation: Center for Inflation Research