The last time inflation was below 3% was in March 2021

Think back to spring 2021. What was happening in your life at that time?

Economically, it was the last time inflation was below 3% – until now. According to the latest Consumer Price Index, it is at 2.9%. While that's not quite the Fed's 2% target, reaching a number that starts with that digit is certainly a major mental milestone. It's hard to remember what life was like then and how much our economy has changed since we last existed.

In the spring of 2021, Sean Snaith, director of the Institute for Economic Forecasting at the University of Central Florida, needed a haircut.

“I’ve basically turned myself into a living Chia pet,” he said.

At the beginning of 2021, the country was in transition. People were getting vaccinated, going back to restaurants and going to the hairdresser. “And the economy was coming back to life,” said Snaith.

People did all the things they couldn't do or didn't feel safe doing. And this pent-up demand was supported by money: low interest rates, rising real estate values, a growing stock market, and stimulus payments.

“We had a fiscal policy that opened the floodgates,” Snaith said. “I guess we didn't see the waterfall that was in front of us.”

The waterfall was inflation. The country was simply not structurally prepared for the flood of demand. Snaith remembers going into a supermarket and finding it locked.

“And finally I saw a sign on the door saying we're closed due to staff shortages,” he said. “And I thought, 'This is bad.'”

There weren't enough workers. There weren't enough goods. That helped fuel inflation in the summer of 2021. By year's end, it had risen to 7%. And for most of that time, the Fed said the inflation was transitory.

“There was so much volatility at the time because of the pandemic and geopolitics,” says Carola Binder, an economist at the University of Texas at Austin who was raising her pandemic baby at the time.

Russia invaded Ukraine in early 2022, driving up oil prices and exacerbating inflation.

“The longer this rise in inflation continued, the more people began to believe that this was no longer just a temporary development,” said Binder.

When the Fed finally started raising rates in March 2022, inflation was at 8.5%. Interestingly, however, economists are still arguing about whether the inflation was temporary or not.

“I think it was still a temporary moment. The question is how long that transition lasts,” said Betsey Stevenson of the University of Michigan, who waited a year for a new dishwasher during the pandemic. “I think what we've learned is that it just took longer for that normalization to happen.”

Americans continued to spend money even though the Federal Reserve raised interest rates eleven times. It has now held rates for over a year. So are we where we need to be?

“I think yes, we have achieved it,” Stevenson said. “But we want a more stable development that stays below 3%.”

She believes that inflation will no longer be the Fed's priority. Instead, it must figure out what interest rate will keep jobs and the economy stable.