With the exception of goldbugs, almost everyone seems to have abandoned their inflation worries. The Federal Reserve is easing again, Wall Street stocks and bonds are rising in tandem, and even the bruised dollar has perked up a bit. 

The Fed's strict 2% inflation target seems to be a thing of the past.

And yet financial markets are chattering about a U.S. economy about to be run "hotter", an investment super-cycle that could extend for years and supply chain disruptions that could reverberate through 2026 and beyond.

Unless AI magically blows up all those potential bottlenecks, we're likely to see inflation heat up too. 

The extent to which households and businesses seek recompense for these price increases, insurance against them or even seek electoral retribution is an open question. 

But one thing is clear: the U.S. inflation regime is in a very different place from where it was before COVID-19 hit.

Friday's release of the September U.S. consumer price report will provide a rare piece of economic clarity amid the official data outage that has accompanied what is now a 21-day government shutdown. 

Even though the Fed's leading lights appear to have convinced themselves that tariff-related price rises will just be one-off blips, the CPI update is likely to make uncomfortable reading.

The consensus forecast is for headline inflation to top 3% for the first time in well over a year, marking a fifth straight month of annual inflation gains. That would put both headline and "core" inflation more than 1 percentage point above the Fed's 2% target, raising the question of whether it's still a target at all.

Graphics are produced by Reuters.

REGIME CHANGE

Even if you assume the tariff impact on prices will be "transitory" - itself a faint echo of the Fed's much-criticised view on the initial post-pandemic inflation burst - the price pressure hits in what some economists assume is a structurally higher-inflation economy.

Fernando Martin at the St. Louis Fed wrote last week that an updated analysis of national inflation trends suggests the United States may now be in a "persistent above-target regime".

On one level, that's uncontroversial and easily observable. 

Headline inflation was below target for 90% of the nine years between when the Fed formally adopted its 2% goal until March 2021, with the Fed's favored gauge of price increases, "core" personal consumption expenditures (PCE) inflation, above 2% for just four months. Both measures have been above 2% ever since.

What that means for households is that prices are about 20% higher on average than before the pandemic, a factor that played a big role in last year's U.S. presidential election.

Martin divides up the past 13 years into three periods, showing average inflation averaging 1.5% from 2012-2020, 5.5% during 2021-2022 and now 2.7% from 2023-2025.

"Arguably, we are now in a situation that mirrors the prepandemic era, with inflation moderately but persistently above the target," he wrote, adding that more than half of consumption expenditures are still on products experiencing annual inflation of 3% or more.

What's more, the distribution of price moves is still skewed to the upside despite inflation easing from recent peaks.