For nearly a decade before the COVID-19 pandemic, inflation in the United States moved so slowly that many consumers barely noticed price increases. Today, the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) index, sits around 2.5%—down from a 40-year peak of 7.3% in 2022. That shift has led some economists to question whether returning to the Federal Reserve’s long-standing 2% target is realistic or even desirable.
The economic environment has changed in ways that complicate inflation management. Recent shifts in trade and fiscal policy have introduced new upward pressures on prices. Tariffs and trade disputes can raise costs for imported goods, while tax cuts and deregulation may stimulate demand, tightening labor and resource markets. Those factors make it harder to rely on the low-inflation norm that many took for granted.
Steve Blitz, chief U.S. economist at TS Lombard, captures this sentiment: “All anyone has known for a generation is that inflation is 2%. That world is now behind us.” As a result, policymakers and businesses must adapt to a landscape where higher inflation is a more persistent possibility.
If inflation settles above 2% on a sustained basis, several notable consequences could follow. Mortgage interest rates might remain elevated—near the 6% range—raising borrowing costs for homebuyers and homeowners who refinance. Corporations could find it easier to protect profit margins by increasing prices rather than pursuing efficiency gains, which would shift how firms approach investment and productivity improvements.
Higher inflation also has fiscal implications. As price levels and interest rates rise, the federal government could see a steeper increase in interest payments on the national debt. That would place pressure on the budget and could crowd out other spending priorities, including defense and entitlement programs, unless tax revenues expand or spending is reallocated.
Ultimately, the return to a low-inflation regime is not guaranteed. The mix of trade policies, fiscal choices, labor market dynamics, and global economic forces means the Federal Reserve faces a more complex task in steering inflation toward any single numerical target. For households, businesses, and policymakers alike, that reality requires recalibrated expectations and strategies to manage the costs and risks of a higher-inflation environment.