Entrenched Inflation – The Monster That Feeds on Itself

Entrenched inflation is the idea that, as prices or costs rise, they become fixed (or entrenched) into the product or service pricing for the long term. As a result, businesses and other decision-makers begin to factor in the increased cost within their forecasts and business models, eventually passing on the cost to consumers through price increases. Once this happens, it becomes hard to bring prices down lower.

A typical example of inflation becoming entrenched are price wages. Imagine an employer providing raises to their employees as an adjustment to the cost of living. It will become difficult to convince employees that their pay needs to decrease without lowering their morale or having your best employees jump ship. With the unemployment rate so low and so many jobs available, the inflationary pressures from wage growth have become a monster that feeds upon itself.

This pressure is why the Fed’s resolve is to combat inflation. Combat inflation before the inflation forces feed itself. Although recent market data show inflation slowing, it is still high. The Fed’s main concern is that the inflationary data will stay at 8% due to the nature of the inflationary pressures. As Powell said, “The burdens of high inflation fall heaviest on those who are least able to bear them.” So, hopefully, the fight against inflation will be short and have low pain on everyone.