The Federal Reserve is nearing a huge milestone as inflation hits 2 percent for just the third time in the past six years.
The central bank targets 2 percent inflation, meaning that it wants to drive inflation that high and then keep it there for the long term. But it’s struggled mightily to reach that benchmark for a long time over the past six years, a possible indication that it has not been supplying enough money.
A report Monday from the Commerce Department, though, showed annual inflation right at 2 percent in March, as measured by the index favored by the Fed.
And “core” inflation, which strips out food and energy prices for a less volatile gauge of price movements, stood at 1.9 percent.
The Fed has seen inflation run below its target since the spring of 2012, except for two months in early 2017 when it rose to just above 2 percent. But that proved short-lived. Inflation then dipped fairly rapidly again after Fed officials, under then-Chairwoman Janet Yellen, moved ahead with two hikes in their target interest rate.
Since then, Yellen and other officials have said their failure to hit the 2 percent target and stay there was the result of special, one-time factors that have temporarily held the number down. Cell service prices, for instance, cratered as carriers competed to offer unlimited data plans. Yellen and others also mused whether they, the central bankers, fully understood inflation.
New chairman Jerome Powell, though, said this month that the Fed’s struggle to hit its 2 percent target can be explained by the fact that the economy, including the labor market, was worse than realized during the recovery. Also, past years have seen the dollar rise against other world currencies, making imports cheaper and thus holding down prices.
The Fed doesn’t favor higher inflation for its own sake. Rather, it’s set a 2 percent inflation target as a mark of price stability, and sees an undershoot of that target as a sign that money is too tight.
Fed officials from all over the country are set to meet this week in Washington to discuss the money supply. Investors don’t expect them to change the interest rate target, but do expect a move as soon as June in response to rising prices.
