The last time inflation was under 3% was March 2021
The last time inflation was under 3% was March 2021
Think back to the spring of 2021. What was happening in your life around that time?
In terms of the economy, it was the last time inflation was under 3% — until now. It’s 2.9%, according to the latest consumer price index. That’s not quite the Fed’s target of 2%, but hitting a number that starts with that digit is certainly a big mental milestone. It’s hard to remember what life was like and how much our economy has changed since the last time we were here.
In the spring of 2021, Sean Snaith, who directs the Institute for Economic Forecasting at the University of Central Florida, needed a haircut.
“I effectively turned myself into a living chia pet,” he said.
In early 2021, the country was in transition. People were getting vaccinated, venturing out to restaurants and getting back in the barber chair. “And the economy was roaring back to life,” Snaith said.
People did all the things they couldn’t do or didn’t feel safe doing. And that pent-up demand was buoyed by money: low interest rates, rising home values, a growing stock market and stimulus checks.
“We had fiscal policy that opened the floodgates,” said Snaith. “I guess we didn’t see the waterfall that was up ahead.”
The waterfall was inflation. The country just wasn’t structurally ready for the flood of demand. Snaith remembers going to a convenience store only to find it locked.
“And finally, I saw a sign on the door that we’re closed down due to staffing shortages,” he said. “And I said, ‘This is bad.'”
There weren’t enough workers. There weren’t enough goods. That helped fuel inflation during the summer of 2021. By the end of the year, it had climbed to 7%. And during most of this time, the Fed was saying inflation was transitory.
“There was just so much in fluctuation at that time because of the pandemic and geopolitics,” said Carola Binder, an economist at University of Texas at Austin, who was raising her pandemic baby at the time.
Russia invaded Ukraine in early 2022, which pushed up oil prices and made inflation worse.
“You know, the longer that rise in inflation went on, the more people were starting to call that it wasn’t transitory anymore,” said Binder.
By the time the Fed finally started raising interest rates in March of 2022, inflation was at 8.5%. Interestingly though, economists are still arguing over whether inflation was transitory or not.
“I believe it still was a transitory moment. The question is how long is the transition?” said Betsey Stevenson at the University of Michigan, who waited a year during the pandemic for a new dishwasher. “I think what we learned was that it just took longer for that normalization to happen.”
Americans kept spending, despite the Federal Reserve hiking interest rates 11 times. It’s held rates for over a year now. So are we where we need to be?
“I think that yes we got there,” said Stevenson. “But, you know, we want to see the more sort of stable, sticking below 3%.”
She thinks inflation is no longer going to be the Fed’s priority. Instead, it’s to figure out what interest rate will keep jobs and the economy steady.
Stories You Might Like
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.
