Inflation: Is This Time Different?

by Eugenio J. Alemán of Raymond James, 5/18/26

Yes, this time is different, but not because inflation itself is unprecedented. What has fundamentally changed is the macroeconomic starting point. Unlike the post-Global Financial Crisis period, when persistent disinflation and repeated downside surprises dominated policy decisions, the economy today is operating in a world where structural disinflation is no longer the default backdrop. That shift has important implications for monetary policy and, ultimately, for markets.

In the decade leading up to the pandemic, the Federal Reserve (Fed) adopted a deliberately patient approach to inflation, allowing price pressures to overshoot the target for extended periods before responding. That framework was a rational response to nearly twenty years of disinflationary forces ranging from globalization to technological change that continually pushed inflation below target. However, that same framework proved ill-suited for the post-pandemic recovery. With hindsight, the Fed should have begun tightening policy earlier as inflation emerged in 2021. But even if the Fed had increased rates immediately as it should have, it is highly unlikely that they would have been able to prevent the increase in inflation and contain Americans as they rushed to “living la vida loca” after years of sheltering in place and postponed consumption. In that environment, it is difficult to imagine an interest-rate level capable of meaningfully restraining spending without causing severe collateral damage to growth and employment. Policy was behind the curve, but the curve itself was unusually steep.

Standard policy benchmarks reinforce this point. Taylor Rule estimates suggest that monetary policy during the recovery was materially more accommodative than warranted, with implied policy rates at times approaching double digits (see graph below). Even under more conservative assumptions, prescribed rates were well above the levels actually in place, underscoring how far policy lagged shifting inflation dynamics. By the time liftoff finally began in early 2022, inflation had already surged close to 8% year over year, forcing the Fed into a far sharper tightening cycle than markets had anticipated.

actual federal funds

Fast forward to today, and the policy landscape looks very different. The Fed is no longer constrained by the zero lower bound, and global disinflation can no longer be taken for granted. While fiscal expansion remains an upside risk to prices, the more immediate concern is that inflation has lost its pre-pandemic anchoring. Even setting aside tariffs and recent oil price increases tied to geopolitical tensions with Iran, inflation is no longer gravitating back toward the stable sub-2% environment that characterized the prior cycle. That reality sharply reduces the Fed’s room for patience.

CPI

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