Inflation’s Last Mile Will Test the Fed

The Federal Reserve’s difficult task suddenly looks even harder. The central bank’s goal has been to restrain demand enough to push inflation gently back to its 2% target without tipping the economy into a recession. Up to now, its strategy has worked well: Inflation has fallen sharply from its post-Covid peak and the economy is strong. Yet this progress lately seems to have stalled.

The challenge of the “last mile” is about to test the Fed’s determination. It’s vital that the central bank stifle any doubts about its commitment to reaching its stated goal.

Headline consumer price inflation increased from 3.2% in the year to February to 3.5% in the year to March. The so-called core consumer price index, which had been expected to fall, stayed flat — and at 3.8% remains way above target. The Fed gives greater weight to the price index for personal consumption expenditures, which is still rising at less than 3% a year. Here too, though, progress toward 2% has slowed. Later in the year, as favorable base effects roll out of the statistics, core PCE might well move higher.


As investors absorbed the new information, they dialed back their expectations of lower rates. Recently markets were pricing in 1.5 percentage points of cuts this year, starting in March. Now they expect one or two quarter-point cuts, starting in September.