The Fed’s Last Mile

Are we still talking about inflation? Yes, we are. When the government releases the October Consumer Price Index (CPI), it may not show a lot of progress. The headline annual CPI is likely to edge down to 3.6 percent from 3.7 percent in October.  The core rate, which strips out food and energy, should remain at 4.1 percent. While those numbers are markedly better than the recent high prints from the summer of 2022 (9.1%), progress on inflation seems to have stalled.

As a refresher on the journey to this place, it was just about this time two years ago, that critics of the Federal Reserve were squawking that the central bank had to act forcefully to curb inflation. It took until March 2022 before the Fed began its most aggressive rate hike campaign since Paul Volcker helmed the institution in mid-1979. Recently, the Financial Times spoke with Bill Dudley, the former president of the New York Federal Reserve, who gave the Fed a grade of “D minus” for getting a “really late” start on its anti-inflation campaign.

But after 11 separate actions, which amounted to short-term interest rates rising from zero to a range of 5.25 -5.5 percent, Dudley notes that Fed officials have “definitely caught up and are either at or pretty close to where they need to be” which earns them a grade of “A minus”. That’s not grade inflation (sorry for the pun!), rather the upgrade in Dudley’s assessment is due to the fact that Fed actions have helped cool inflation, without pushing the economy into a recession, at least so far. Yet because the Fed itself targets 2 percent inflation, there is obviously still work to be done. In the parlance of ecommerce, the Fed is now experiencing a so-called “last mile” problem.

Last mile was a phrase that was coined to describe the supply chain process, which starts when your order for an item reaches a warehouse. From there, it travels far and wide before it reaches your home. But it is the last mile of the process that can prove expensive and disastrous, especially if something goes awry. According to research from Capgemini, “the final leg of the journey where a product lands in a consumer’s hands, is now more significant than ever.  A superior last-mile experience engages and retains consumers, with our research showing that three-quarters are willing to spend more if they are satisfied with the delivery services.”

For the Fed, consumers may not have liked peak inflation, but as CPI tumbled from 9.1 percent to 3 percent, they seemed to be able to move on. But this “last mile” of progress on inflation, from the current level of 3.7 percent to the Fed’s desired 2 percent, is proving hard to swallow and is impacting how we feel. The preliminary reading of the University of Michigan November Sentiment Index showed that inflation expectations remain high. Consumers are worried that high prices will stick around at least for another year and will also remain higher over the longer term. This is worrying to folks at the Fed, who are monitoring whether those anxieties translate into a change in spending patterns, which at one extreme, could cause a more substantial economic slowdown, as people pull back on spending, and at the other extreme, cause consumers to jump in and buy before prices rise by even more.

When Federal Reserve chair Jay Powell spoke at an IMF event on November 9th, he said that Fed officials had a “long way to go” before they will get to 2 percent. “We know that ongoing progress toward our 2 per cent goal is not assured: inflation has given us a few head fakes.” Gita Gopinath, the first deputy managing director at the IMF chimed in and said that while economists are pleased that inflation is “headed in the right direction”, “this mile will likely be the toughest.”