Fed Set to Cut Interest Rates as Inflation Nears Target

Inflation is approaching the Federal Reserve's 2% target, prompting expectations that the central bank may start cutting interest rates as early as September. Despite earlier disruptive inflationary periods, the overall price level is now close to the Fed's long-term target. However, higher prices are likely to persist.

Inflation is nearing the Federal Reserve's 2% target, and the central bank is expected to begin cutting interest rates as soon as September.

While it may take a while for the pace of price increases to fall all the way to 2% - and policymakers will be sensitive to signs inflation is taking off again - the last chapter of the battle appears to be underway. It has been a disruptive period. But after a decade when inflation largely ran below the Fed's target, the overall price level in the U.S. economy is now not too far from where it would have been had the central bank hit its inflation goal month-by-month all along.

It wasn't the worst bout of inflation the U.S. has experienced. But it was bad and moreover it happened fast, with food prices skyrocketing, home prices stretching the limits of affordability, and an array of services like auto insurance still in the process of resetting higher.

The bad news for consumers moving forward: Even if price increases have been tamed by and large, higher prices are here to stay. Price level shocks don't reverse, and even overall price drops from one month to the next are rare. Economists would argue that it wouldn't even be healthy if they did, since deflation - a chronic drop in prices - can be even more corrosive to the economy than prices that rise too fast. The Fed's next meeting on July 30-31 is expected to keep rates steady.

(With inputs from agencies.)