Is the Fed’s inflation goal actually achievable in the post-pandemic macro reality, defined as it is by socioeconomic upheaval, populist politics and seismic geopolitical shifts?

It’s hard to say. Probably not. Or at least not sustainably and not in a manner that’ll feel to anyone like policymakers are exercising the sort of divine “control” they claim for themselves.

Macro volatility’s here to stay, I’d argue, and while that cuts both ways — i.e., it’s certainly possible that inflation in the US could dissipate or disappear altogether in a deep downturn — I continue to espouse some version of the view that says the so-called “Great Moderation” was in fact an anomaly, not any “new normal.” It certainly wasn’t a return to any “old normal.” The history of our species is quite volatile and on every conceivable vector, inflation included.

I still like the figure shown above. That’s UK inflation going back to the year 1200. 2%’s the furthest thing from “normal.” You could argue the relative stability of price growth post-1985 (give or take) is a testament to the refined skillset of professional economists but… well, I don’t think that’s the best way to think about it. Rather, I think hyper-globalization post-1990 and a constellation of other factors exogenous to monetary policy are (were, past tense) to thank for stable prices and pockets of predictable disinflation.

In any case, the latest CPI data out of the US was — how should I put this? — not great, and although an update on wholesale prices released the following day appeared to suggest the Fed’s preferred measure of consumer prices (PCE inflation) was a semblance of benign at the beginning of the year, policymakers were hit with a truly harrowing upside revision to a key measure of household inflation expectations late last week.

Long story short: All expressions of confidence aside, the Fed can’t guarantee price stability. That’s always been a myth. The notion that a panel of technocrats can manage a macro aggregate (which is anyway mis-measured, because as I never tire of reminding readers, it’s impossible to accurately measure macro aggregates in an economy larger than, say, a small village) in a narrow band is little short of lunacy. There are just too many variables, and Donald Trump’s just introduced a host of new ones.

With that in mind, core PCE data due this week will probably suggest underlying inflation on the Fed’s favored metric ran 0.3% in January, the quickest in months (that’s what counts as “benign,” apparently).

As the figure reminds you, 0.3% monthly readings aren’t consistent with the post-GFC, pre-COVID average, and as such, they aren’t consistent with 2% annual core inflation either. 12-month core PCE is seen at 2.6% for January, the slowest since last summer, but still well above target. The inescapable reality is that the disinflation process has stalled in the US.

For once, the Fed’s not in complete denial. They know they’re in danger of a scenario where price growth resets higher in perpetuity. I’d argue we’re already in that scenario. I think the next time America sees 2% core inflation will be in a recession.

Minutes from the January FOMC meeting confirmed the Committee’s on hold pending better inflation readouts and clarity on trade policy. Neither’s forthcoming. At least not in the very near-term.

The figure below, from BMO’s Ian Lyngen, illustrates the intractability of the problem. Core PCE has now spent 46 months above 2%, the longest streak of the “modern” era, and it’s not close.

“Not only is the 46-month streak troubling, even the 2.63% cycle low from June 2024 is higher than all but one core-PCE YoY print between 1994 and 2020,” Lyngen remarked.

Let’s face it: Without some demand destruction, the Fed’s not likely to get 2% core price growth consistently. Demand destruction doesn’t have to mean a depression, nor even a recession for that matter. But this idea officials seem to harbor that it’s possible to sustain disinflation with an unemployment rate glued at (or even below) NAIRU and personal spending rolling along at a 4% SAAR, is pure fantasy.

Of course, a growth shock could get inflation down sharply and quickly, but that’s not what you want. You want a glide path back to something that looks like a stable equilibrium, and I just don’t believe the domestic socioeconomic circumstances are conducive to that.

Trump may be able to get away with mass firings, tax cuts for the wealthy and supply-side gimmickry for a while, but let’s not forget: He owes his political fortunes to populism. You don’t necessarily have to deliver tangible results for the masses as a populist, but you gotta look like you’re trying. Once the novelty wears off — i.e., once people realize that their federal job could be cut, and once people stop being amused by silly antics like canceling pennies and decreeing plastic straws great again — Trump will need to pivot to something that looks more like classical populism. That’ll be inflationary above and beyond any tariff-related price pressures.

One more quick word on inflation in the US context: If you’ve spent any time spending money in the services sector recently, you know inflation’s out of control on that side of the economy. The disparity between, on one hand, the value proposition on offer in services (i.e., what you get for the all-in, tip-included, price to avail yourself of someone else’s “skills”) and, on the other, the price of goods (i.e., how far your money goes when you’re after “stuff”), seems almost nonsensically vast these days. While that dynamic’s nothing new, it feels like it’s getting more pronounced all the time.

Also on the US data docket this week: Updates on the two marquee gauges of US home prices (speaking of inflation), Conference Board confidence (seen at 102.8), new home sales (economists expect a 3% drop), pending home sales (seen falling marginally) and the second estimate of Q4 GDP.