• The cost of living soared in 2021 and has not returned to the Fed's 2% annual target since.
  

• The Fed has been battling high inflation for nearly four years.
  

• Economists point to the Federal Reserve's interest rate cuts, rising oil prices, consumer psychology and potential tariffs as factors curbing the progress of inflation.
  

Higher-than-usual inflation has been hurting household budgets since 2021. What's stopping prices from returning to normal?

As of January, inflation, as measured by the Consumer Price Index, had been below the Fed's 2% annual target for three years and 10 months. Although inflation has fallen sharply from its peak in 2022, the Fed has not yet completely curbed it.

Economists have identified several powerful forces that cause inflation to become disturbingly overheated. In comments this week, Deutsche Bank macro strategist Henry Allen identified four factors holding back inflation in the short term.

The Federal Reserve has lowered its benchmark interest rate at its last three meetings, starting in September. A rise in the federal funds rate would push up interest rates on a variety of loans to businesses and individuals, discourage borrowing and spending and act as sand in the gears of the U.S. economic engine.

The Fed lowered interest rates by one percentage point to a range of 4.25% to 4.5% - still high enough for Fed officials to consider them "restrictive" or a drag on the economy. But lowering rates would bring more money into the system and could increase inflation, Allen wrote.

President Donald Trump has pledged to impose steep tariffs on U.S. trading partners, especially China, upon taking office. Economists say businesses are likely to pass on much of the import taxes to consumers, pushing up prices.

What's more, the impact of tariffs may be more than just a one-time increase in prices. As the pandemic has proven, the cost of one item has ramifications throughout the supply chain. For example, when COVID-19 restrictions in Taiwan disrupted computer chip production, prices for a variety of products rose, surprising policymakers.

Austan Goolsbee, President of the Confederacy. The Chicago Reserve Bank noted in this week's online Q&A:

“Supply chains are more integrated, more complex and extend over longer periods of time than we thought,” he said. "When computer chips are in short supply, electronic components are affected, electronic components affect cars, and then cars affect delivery companies."

The story continues