Inflation rebounded in August, but signs are emerging that it could be getting back on track to the Federal Reserve’s goal of 2 percent, according to a Florida Atlantic University economist.

Inflation rebounded in August, but signs are emerging that it could be getting back on track to the Federal Reserve’s goal of 2 percent, according to a Florida Atlantic University economist.

 Prices grew 3.4 percent over the past year, up from 3.3 percent for the 12-month period ending in the prior month. Inflation has averaged 4.1 percent per year since January 2020, FAU’s Monthly Inflation Report shows. The Federal Reserve’s monetary policy committee projects that inflation will be 3.3 percent for 2023.

 “Energy prices surged in August, pushing the headline inflation rate a bit higher,” said William Luther, Ph.D., associate professor in the College of Business. “But those prices will likely moderate in the months ahead. More broadly, it looks like inflation is finally coming down.”

FAU’s Monthly Inflation Report, produced by Luther and student Morgan Timmann, compares the current price level to where it would have been had inflation stayed at 2 percent. It also provides a forecast of the price level based on projections from the Federal Reserve’s monetary policy committee and estimates expected inflation over the next five and 10 years. Taken together, these indicators can help people renegotiate their wages, purchase orders or lending contracts, or enter new agreements with better information about the monetary policy environment.

The Federal Reserve is committed to bringing inflation back down to its 2 percent target, however, the available data suggests they have already achieved their goal, according to Luther.

“It appears that the Federal Reserve finally has inflation back on target,” Luther said. “Excluding volatile food and energy prices, the Personal Consumption Expenditures Price Index grew at a continuously compounding annual rate of 2.1 percent over the last three months and just 1.7 percent in August. Bond markets were pricing in around 2 percent inflation per year over the next five years at the end of September. In other words, inflation has returned to normal and inflation expectations appear to be well-anchored at the Fed’s target.”

It could be a sign that it is time for the Federal Reserve to put a pause on their rate hikes, he added. While annual inflation remains high­­­ (the PCEPI grew 3.4 percent over the last year), the past few months have seen much less inflation.

“The high inflation rates observed over the 12-month period mainly reflect price increases that happened months ago. Those price increases in the past shouldn’t be used to justify further rate hikes now,” Luther said. “What matters now isn’t how fast prices were rising six to 12 months ago, but how fast they are rising now and will likely continue to rise into the near future.”

Prices have grown much faster over the past few years, forcing Americans to readjust their expectations and purchases after having relatively low and stable inflation for the past 30 years.

“If you haven’t had a raise since January 2020, then you would need a 16 percent raise today just to break even because that’s how high prices have risen since then,” Luther said.

-FAU-