The Sticky Last Mile

This final episode begins where Episode 9 ended — in December 2022, with CPI at 6.4% and falling, the Fed Funds rate at 4.10% and rising, and the central question of American economic policy hanging in the balance: could the Federal Reserve bring inflation back to 2% without triggering a recession?

Every previous episode in this series that involved deliberate disinflation had required a recession. Volcker's war in Episode 6 cost 10.8% unemployment and the deepest downturn since the Great Depression. Even the modest tightening in Episode 7 coincided with a recession. The historical record was unambiguous: you could have low inflation or low unemployment, but bringing inflation down from elevated levels always demanded a period of pain.

What happened between 2023 and early 2026 defied that precedent — but not cleanly, and not quickly. The "last mile" of disinflation proved far more stubborn than anyone had expected, and the experience revealed something about inflation that the previous nine episodes had only hinted at: the hardest prices to bring down are the ones people pay every month and can't avoid. Rent, insurance, healthcare, childcare. The essentials.

The first six months of 2023 were exhilarating for inflation optimists. CPI year-over-year fell from 6.3% in January to 3.1% in June — a three-percentage-point decline in half a year. The disinflation was broad-based and encouraging. Energy prices stabilized. Goods prices, which had surged during the supply-chain crisis of 2021-22, were actively deflating. Used car prices, the original poster child for "transitory" inflation, fell 5.2% year-over-year in June 2023. Global supply chains had largely healed. Shipping container rates from Shanghai to Los Angeles, which had peaked at $15,000 in 2021, were back below $2,000.

The optimism was understandable but premature. The components of inflation that had driven the first surge — energy, goods, supply chains — were precisely the components that were easiest to reverse. They involved globally traded commodities with transparent pricing. When oil fell from $115 to $70, the effect on CPI was immediate and mechanical. When semiconductor production recovered, used car prices normalized within months.

But inflation is not just goods and energy. In the Consumer Price Index, shelter accounts for roughly one-third of the total weight. And shelter inflation operates on a fundamentally different clock than the rest of the economy. When market rents stop rising, the CPI doesn't notice for twelve to eighteen months, because the Bureau of Labor Statistics surveys existing lease agreements — not new listings. Market rents had peaked in mid-2022. The CPI shelter component wouldn't fully reflect that until late 2024 at the earliest.

The villain of the last mile had a name: shelter inflation. In January 2023, while headline CPI was running at 6.3%, the shelter component of CPI was rising at 7.9% year-over-year. By June 2023, headline CPI had fallen to 3.1% — but shelter was still at 7.8%. Since shelter carries a weight of approximately 36% in the CPI basket, it was single-handedly adding nearly three percentage points to the headline figure. Without shelter, CPI would have been close to zero.

This was not a mystery. The lag between market rents and CPI shelter was well understood by economists. Private-sector rent indices — Zillow, Apartment List, CoreLogic — had shown rents decelerating sharply since mid-2022. But the BLS methodology, which surveyed existing leases and owners' equivalent rent based on what homeowners estimated they could charge to rent their homes, updated slowly. Each month, only one-sixth of the housing sample was re-surveyed. A lease signed at the peak of the rental market in mid-2022 might not be re-surveyed until late 2023 or even 2024.

The result was a slow-motion normalization that tested the patience of policymakers, markets, and the public. Shelter CPI YoY dropped from 7.9% in January 2023 to 6.2% by December 2023 — encouraging but still far above the pre-pandemic norm of 3.0-3.5%. Through 2024, it continued its glacial descent: 5.1% in June, 4.6% in December. By the end of 2025, it had reached 3.2% — finally approaching the range consistent with 2% headline inflation. The entire process took nearly three years.

The shelter lag created a policy dilemma that had no precedent in this series. In every previous episode, the question had been straightforward: is inflation too high? If yes, tighten. If no, ease. But in 2023-24, the Fed faced a more subtle question: headline CPI was at 3-3.5%, but the Fed could see — in real-time rental data, in the pipeline of expiring leases, in the mathematical certainty of the lagged adjustment — that shelter inflation would come down over the next twelve to eighteen months. Should it cut rates preemptively, based on where inflation was heading? Or should it wait until the CPI actually showed the decline?

Powell chose to wait. The ghosts of Arthur Burns and the "transitory" debacle argued for patience. The Fed had been burned once by predicting that inflation would resolve on its own. It would not make that mistake again.

The Fed raised rates for the final time in July 2023, bringing the Fed Funds rate to 5.33% — the highest level since January 2001. And then it stopped. Not because inflation had been conquered, but because the pace of decline seemed sufficient and the risks of over-tightening were growing. The banking system had already shown stress: Silicon Valley Bank and Signature Bank had failed in March 2023, and First Republic followed in May, all victims of the rapid rate increases that had cratered the value of their bond portfolios.

What followed was the longest plateau at a cycle peak since 2006-07. The Fed held at 5.33% for thirteen consecutive months — from August 2023 through September 2024. "Higher for longer" became the mantra. Markets, which had initially priced in rate cuts by March 2024, were forced to push expectations back repeatedly — to June, to September, and eventually to the actual first cut in September 2024.

During this long pause, the economy performed a feat that most economists had considered unlikely: it kept growing. GDP expanded at 4.9% in Q3 2023 and 3.4% in Q4 — far above expectations. Consumer spending remained resilient, supported by the strong labor market and the remnants of pandemic-era savings. The housing market froze — with mortgage rates above 7%, transaction volume collapsed — but home prices did not crash. The unemployment rate crept up from 3.4% in April 2023 to 3.8% by December, an increase so modest that it barely registered as a slowdown.

The soft landing, which in December 2022 had been a hope, by mid-2024 was becoming a reality.

On September 18, 2024, the Fed cut rates for the first time since the pandemic emergency — a 50-basis-point reduction that brought the Fed Funds rate to 5.13%. It was a decisive move, signaling that Powell believed the balance of risks had shifted from inflation to employment. Unemployment had ticked up to 4.2% in July and August, and while the labor market was far from weak, the trend was unmistakable: the cooling was underway.

Two more cuts followed in quick succession — 25 basis points in November and 25 in December, bringing the rate to 4.33% by year-end. Then the Fed paused again, holding at 4.33% through the first eight months of 2025 as it assessed the data. CPI had reached 2.4% in March 2025 — tantalizingly close to the 2% target — but rebounded to 3.0% in September, demonstrating that the last mile was not a straight line but a bumpy, uncertain path.

A second round of cuts began in September 2025 — another 25 basis points, followed by reductions in October, November, and December that brought the rate to 3.72% by year-end. By February 2026, the Fed Funds rate stood at 3.64%, with CPI running at 2.4%. The real Fed Funds rate — the gap between the policy rate and inflation — was still positive at 1.2%, meaning monetary policy remained modestly restrictive. The Fed had brought rates down from emergency levels but was not yet back to neutral.

By early 2026, the verdict on the soft landing was largely in. The numbers told a story that would have seemed implausible to any Fed chair in this series before Powell.

Across eighty years of inflation history, a pattern emerges: each episode was shaped by the memory — and the mistakes — of the ones that came before.

Inflation has many causes but only one cure: credibility. Across eighty years, every episode that resolved well — 1946, 1951, 1990, 2008, 2023-25 — shared one feature: anchored expectations. When the public believes that inflation will return to normal, it does, because workers don't demand higher wages, businesses don't preemptively raise prices, and the self-reinforcing spiral never ignites. When that anchor is lost — as it was in the late 1960s and 1970s — the cost of restoring it is enormous. Volcker paid with 10.8% unemployment. The lesson is that credibility, once lost, is bought back at a price many times what it cost to maintain.

The speed of the policy response matters as much as its magnitude. This series is littered with the wreckage of delayed action. Burns waited too long in 1972-73. Miller never acted with conviction in 1978-79. Powell waited a full year past the point when inflation had clearly exceeded 5% in 2021. Each delay made the eventual tightening more painful. Volcker's success came not from gentleness but from overwhelming force — he raised rates until inflation surrendered. Powell's relative success came from holding rates at 5.33% for thirteen months until shelter worked through the system. In both cases, conviction — not half-measures — was the decisive factor.

Supply shocks are transitory; demand-fueled inflation is not. Episodes 7 (Gulf War) and 8 (2008 commodity surge) proved that pure supply shocks — even dramatic ones — resolve on their own when expectations are anchored. The oil embargo of Episode 4 and the Iranian Revolution of Episode 5 spiraled because they hit economies where inflation was already entrenched and expectations had been un-anchored by years of policy failure. The post-COVID inflation was dangerous precisely because it combined both: a supply shock (broken supply chains, war in Ukraine) amplified by the most aggressive demand stimulus in peacetime history.

The shelter lag changes the game. In the 1940s, 1970s, and 1980s — the eras that dominate this series — the CPI was driven primarily by food, energy, and goods. Shelter was a smaller share of the basket, and rental markets were less dynamic. By the 2020s, shelter had become the single largest CPI component at 36%, and the BLS methodology's inherent lag meant that the CPI painted a picture of inflation that was always twelve to eighteen months behind the reality of the housing market. This created a new policy challenge: the Fed was forced to make decisions about an inflation reading it knew to be stale. Powell's patience — holding rates steady while waiting for the shelter component to catch up with the reality of a cooled rental market — may prove to be the defining monetary policy innovation of this era, as significant in its own way as Volcker's Saturday Night Special.

A soft landing is possible — but it requires both skill and luck. The 2023-25 disinflation was the first successful soft landing from a major inflation episode in American history. Unemployment rose by just one percentage point — from 3.4% to 4.4% — while CPI fell from 9.1% to under 2.5%. No financial crisis. No deep recession. But the achievement required favorable conditions: a labor market so tight that it could absorb the cooling without mass layoffs, a shelter component that was lagging rather than leading, and an absence of new supply shocks. A less fortunate Fed might have faced a recession triggered by the banking stress of March 2023, or a renewed energy crisis from the Middle East, or a financial market dislocation from the rapid rate increases. Powell's soft landing was genuine, but it was not inevitable.