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Allison Schrager

Inflation’s New Normal Will Be 4%. Get Used to It.

Many of the forces keeping prices in check have started to reverse, but bigger gains in consumer prices won’t be bad for the economy as long as they’re predictable.

The Fed has lost a lot of credibility.

The Fed has lost a lot of credibility.

Photographer: Valerie Plesch/Bloomberg

Now that inflation is back, it's not going away anytime soon. The Federal Reserve expects it to fall below 3% next year and eventually go back to 2%. But there are reasons to think that’s far too optimistic. We are living in a new world. Even after things get back to normal that could mean inflation averages 4% or even 5% for the foreseeable future.

The Fed can almost be forgiven for its optimism. The idea that inflation was no longer a concern had become conventional wisdom before the pandemic. Many articles were written explaining why. Pension funds pulled back on their promises to increase benefits with inflation, and hardly anyone noticed.