Getting to 2% inflation won’t be easy. This is what will need to happen, and it might not be pretty

In theory, getting inflation closer to the Federal Reserve’s 2% target doesn’t sound terribly difficult.

The main culprits are related to services and shelter costs, with many of the other components showing noticeable signs of easing. So targeting just two areas of the economy doesn’t seem like a gargantuan task compared to, say, the summer of 2022, when basically everything was going up.

In practice, though, it could be harder than it looks.

Prices in those two pivotal components have proven to be stickier than some other things like food and gas or even used and new cars, all of which tend to be cyclical as they rise and fall with the ebbs and flows of the broader economy.

Instead, getting better control of rents, medical care services and the like could take … well, you might not want to know.

“You need a recession,” said Steven Blitz, chief U.S. economist at GlobalData TS Lombard. “You’re not going to magically get down to 2%.”

Annual inflation as measured by the consumer price index fell to 3.7% in September, or 4.1% if you kick out volatile food and energy costs, the latter of which has been rising steadily of late. While both numbers are still well ahead of the Fed’s goal, they represent progress from the days when headline inflation was running north of 9%.

The CPI components, though, told of uneven progress, helped along by an easing in items such as used vehicle prices and medical care services but hampered by sharp increases in shelter (7.2%) and services (5.7% excluding energy services).

Drilling down further, rent of shelter also rose 7.2%, rent of primary residence was up 7.4%, and owners’ equivalent rent, pivotal figures in the CPI computation that indicates what homeowners think they could get for their properties on the rental market, increased 7.1%, including a 0.6% gain in September.

Without progress on those fronts, there’s little chance of the Fed achieving its goal anytime soon.

“The forces that are driving the disinflation among the various bits and micro pieces of the index eventually give way to the broader macro force, which is rising, which is above-trend growth and low unemployment,” Blitz said. “Eventually that will prevail until a recession comes in, and and that’s it, there’s nothing really much more to say than that.”

On the bright side, Blitz is among the consensus that sees any recession being fairly shallow and short. Even more so, many Wall Street economists, Goldman Sachs among them, are coming around to the view that the much-anticipated recession may not even happen.

Those factors “will only lead to higher rental prices and worsening affordability conditions in the long run,” wrote Christopher Bruen, senior director of research at the National Multifamily Housing Council. “Rising rates threaten the strength of the broader job market and economy, which has not yet fully digested the rate hikes already enacted.”

The notion that rate increases totaling 5.25 percentage points have yet to wind their way through the economy is one factor that could keep the Fed on hold.

That, however, goes back to the idea that the economy still needs to cool before the Fed can complete the final mile of its race to bring down inflation to target.

One positive in the central bank’s favor is that pandemic-related factors largely have washed out of the economy, but other factors linger.

“Pandemic-era effects have a natural gravitational pull and we’ve seen that take place over the course of the year,” said Marta Norton, chief investment officer for the Americas at Morningstar Wealth. “However, bringing inflation the remainder of the distance to the 2% target requires economic cooling, no easy feat, given fiscal easing, the strength of the consumer, and the general financial health in the corporate sector.”

Fed officials expect the economy to slow this year, though they have backed off an earlier expectation for a mild recession.