The Inflation Picture: Persistent and Increasingly Pernicious
Key Highlights
- Multiple shocks over the past years have led to a cumulative increase in inflation, making it more persistent and harder to predict.
- Traditional inflation measures may underestimate ongoing price increases due to the exclusion of volatile items like energy and food, which are now showing broader price pressures.
- Consumers are adjusting their expectations, digging into savings buffers and experiencing reduced purchasing power amid rising prices.
- Businesses face delayed pass-through of tariffs and increased costs from energy and raw materials, impacting supply chains and pricing strategies.
- The rise in investment in AI and data-center infrastructure is affecting supply chains for electronics, potentially influencing long-term inflation trends.
When do a handful of independent events become a pattern that changes people’s expectations of what’s ahead?
That question emerged as the central theme of a recent National Association of Business Economics webinar on the factors driving inflation and how consumers and businesses are reacting to them.
It’s been more than six years since the full-fledged arrival of COVID-19 and the resulting lockdowns rocked the world’s supply chains and set in motion an inflation wave. That has since been followed by an energy shock from Russia’s invasion of Ukraine, President Donald Trump’s tariff wave last year and another oil price crisis stemming from the Iran war launched in February. Those factors have been major contributors to consumer prices rising some 28% since the beginning of 2020.
What trimmed mean inflation may be missing now
Economists regularly exclude certain, more volatile items — most prominently, food and energy — from their measurements to try to get a clearer picture of underlying trends. Recently, economy and market watchers have paid more attention to a measure called trimmed mean inflation, which is favored by new Federal Reserve Chair Kevin Warsh. That measure subtracts the items with the most extreme price changes, both positive and negative, to measure core inflation in another way.
Speaking on the June 1 NABE webinar, New Century Advisors Chief Economist Claudia Sahm pointed out that trimmed mean has lately been excluding the prices of airfares, beef and software, among other things. She noted that one could make the argument that a lot of recent events qualify as one-off items and thus ought to be excluded from efforts to get to a clean inflation reading.
But that might not be the way to go precisely because we’ve persistently seen such increases of late, Sahm said. It’s also worth noting, she added, that the share of goods and services that are seeing larger price increases — movements that would put them outside the ranges included in various forms of trimmed mean inflation — is growing as the effects of recent shocks have stacked on each other.
Laura Rosner-Warburton, the senior economist and a partner at MacroPolicy Perspectives, shared a similar view of that cumulative effect and said economists and policymakers should be “open-minded” about how today’s price environment might develop compared to similar past scenarios. Had there been fewer outlier events pushing up inflation readings, she said, Fed officials in charge of interest-rate policy could “absolutely” look through them.
“But it appears there’s some persistence,” Rosner-Warburton said, adding that the Fed will need to lean toward hiking rates to make sure that supply shocks don’t lead to higher inflation expectations.
Has that cat been crawling out of the bag this spring? The Cleveland Fed’s measure of expected inflation over the coming years has risen more than a percentage point since March to about 3.5%, its highest level since September 2022. Sahm said consumers’ outlook “has the flavor” of adjusting to repeatedly being hit with inflation by expecting more inflation. That’s especially the case when they are increasingly struggling to maintain their spending.
“It’s pretty clear households are digging into their buffers,” Sahm said. “The purchasing power is taking a hit.”
How tariffs and energy costs are still pressuring businesses
Business leaders also have been feeling the weight of inflation for a while and are growing increasingly vocal about that burden in various surveys. The energy shocks are playing a part in that, but leadership teams are also still dealing with the effects of the many tariffs that started to be put in place more than a year ago.
“There does seem to be some delayed pass-through,” Omair Sharif, the founder and president of Inflation Insights, said on the NABE webinar. His view was echoed by Rosner-Warburton, who said she’s expecting tariff impacts will linger for another six months and put clothing and cars among the categories where “there’s more to see.”
An April survey from Endeavor Business Intelligence showed that many businesses are reacting to tariffs more slowly than some might have expected, even if 70% of respondents said they were facing persistent burdens. As leadership teams continue to refine their tariff-mitigation strategies, they now also have to wrestle with new cost pressures for energy and raw materials.
“The current atmosphere is one of extreme uncertainty and concern for the future in terms of both price stability and longer-term supply continuity related to the Iran conflict and Strait of Hormuz closure,” one manufacturing executive responded to the most recent Institute for Supply Management Manufacturing PMI Report, typifying the comments of numerous others. “We have a lot of negotiations in process related to requested price increases, some related to oil prices and some still fallout from the 2025 tariff/geopolitical climate.”
AI investment may be creating its own price pressures
Some companies are now also beginning to feel the effects of the artificial-intelligence investment boom. The billions of dollars going into data-center construction and related work are sucking up the supply of memory chips and other components and crowding out investment elsewhere, Rosner-Warburton said June 1.
If we wait for definitive evidence that high inflation has become embedded in the economy, it may require larger policy adjustments, at greater cost.
- Beth Hammack, Federal Reserve Bank of Cleveland
That effect, she added, could take several years to dissipate and thus remove from inflation calculations the long-running trend of electronics regularly becoming both better and cheaper. That disinflationary force also is being threatened by some software companies, including the biggest names in AI, hiking their prices as they add features or look to recoup at least some of their spending to date. See OpenAI’s expansion of its price tiers and Microsoft leaders’ plans to substantially lift the prices of the company’s 365 suite on July 1.
What business leaders should plan for if inflation stays elevated
The bottom line: There are indications that we could be entering an era in which inflation is both higher and more persistent, and not because of one-time shocks, as it mostly has been since 2020. For now, the environment doesn’t look like stagflation — it would take a lot to push real-time GDP trackers now at 2.5% for the second quarter into flat or negative territory — but it’s also not the boomflation we experienced coming out of the pandemic.
“I’d summarize the current state of manufacturing in the U.S. as seeing modest demand increases, limited employment growth (and possibly mild contraction), and very rapid increases in input prices,” Jason Miller, a Michigan State University supply-chain professor, wrote on June 2. “If you are an inflation hawk (after witnessing the pains caused by the 2021–2023 inflation cycle, I’ve strongly shifted into this camp), these [May PMI] data support the need for hiking the federal funds rate very soon, perhaps even at this month’s meeting.”
Beth Hammack, president and CEO of the Cleveland Fed, doesn’t agree with that timing but appears to generally be thinking the same thing. Speaking to the City Club of Cleveland on June 2, she said that it’s “reasonable” to keep rates where they are for now but is prepared to act if today’s trends continue.
“I’m more concerned about the growing risks of persistently elevated inflation than the risks to full employment and also that monetary policy may not be sufficiently restrictive to bring inflation down to 2%,” Hammack said. “If we wait for definitive evidence that high inflation has become embedded in the economy, it may require larger policy adjustments, at greater cost.”
About the Author
Geert De Lombaerde
Contributor
A native of Belgium, Geert De Lombaerde joined EndeavorB2B in September 2021 to cover public companies, markets, and economic trends primarily for IndustryWeek, FleetOwner, Oil & Gas Journal, T&D World, and Healthcare Innovation. His work focuses on strategy, leadership, capital spending, and mergers and acquisitions, and he also works with Endeavor Business Intelligence on surveys and data projects.
Geert has been in business journalism since the mid-1990s. With a degree in journalism from the University of Missouri, he began his reporting career at the Business Courier in Cincinnati, initially covering retail and the courts before shifting to banking, insurance, and investing. He later was managing editor and editor of the Nashville Business Journal before being named editor of the Nashville Post in 2008. He led a team that helped grow the Post's online traffic by an average of more than 15% annually before joining Endeavor.
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