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The fight against inflation in the U.S. is currently in a very difficult phase

ARI SHAPIRO, HOST:

The Federal Reserve has been fighting inflation for years now, taking steps like raising interest rates. So far, it's been working. But experts worry about possible side effects. If history is any indication, we could be entering the hardest part of the inflation fight. NPR's Stacey Vanek Smith is here to explain. And, Stacey, put this moment in perspective for us. Inflation right now is at 4.9%. What should it be?

STACEY VANEK SMITH, BYLINE: Well, we want to see inflation at about 2%. That's kind of seen as the inflation sweet spot. It means prices are rising at about 2% a year or so. Things stay pretty affordable. The economy is kind of growing at a slow, steady pace. The U.S. was in that sweet spot for decades, but right now, as you say, inflation in the U.S. is at nearly 5%. And the big question is, can the Federal Reserve get inflation back to that 2% sweet spot without causing a lot of economic pain?

SHAPIRO: But when you look at the last year, inflation has fallen a lot. There has not been a recession. Unemployment is near historic lows. Things look good. So what's the concern?

SMITH: Well, it looks like the inflation fight gets harder the lower you go. So last year, like you say, inflation was over 9%. It's already down to about 5%. But the last few percentage points could be a much rougher ride. There's this new research out from researchers at the University of North Carolina and Stanford, and they looked at more than 80 countries that have battled inflation. And they found that it is much harder to get from moderate inflation to low inflation than it is to get from high inflation to moderate inflation.

SHAPIRO: What actually happened is these countries tried to push inflation lower and lower.

SMITH: Yeah. So some of the countries that were battling really high inflation, you know, 60%, 80%, countries like Argentina and Israel, almost all of them were actually able to get that inflation down below 40%, which is considered moderate inflation. And they were able to do it pretty fast, in roughly a year. But getting from moderate inflation down to like a low, single-digit inflation rate, that was much harder. Economist Peter Blair Henry, one of the study's authors, found that out of the 56 countries that fought the moderate inflation battle, only a handful, actually achieved the low interest rates that they were hoping for.

PETER BLAIR HENRY: There are only five episodes of successfully reducing moderate inflation, all of it painful - unemployment went up, growth goes down.

SMITH: And the countries that were successful, which include South Korea and Egypt, they all saw their economy slow down. They all saw job losses. And those fights took a lot longer - several years on average.

SHAPIRO: And do they know why moderate inflation is so much harder to fight than high inflation?

SMITH: Well, economist Peter Blair Henry thinks it has to do with the two root causes of inflation. So one of the root causes is psychological. I mean, inflation changes our behavior as consumers, as business owners. For example, if you expect prices are going to keep rising a lot, you might ask for a bigger raise than you normally would. Or if a restaurant's printing menus, they might print menus with extra high prices if they expect their costs are going to go up. And that has this spiral effect.

HENRY: If you can just break that cycle, you can get rid of big, huge part of the inflation problem and just be left with the structural part.

SHAPIRO: What does he mean by the structural part? Is that something we should worry about?

SMITH: Yes, the structural part, that's the second root cause of inflation. And to solve that, you essentially need to take money out of the economy, get people to spend less. So when the Federal Reserve raises interest rates, it makes it more expensive to borrow money so people spend less, businesses sell less stuff to people, and then those businesses stop expanding. They stop hiring. They often lay people off.

SHAPIRO: So what does all this mean as the Federal Reserve plans to meet this week?

SMITH: Well, it means that if the Federal Reserve can manage to get us from what was nearly double-digit inflation a year ago down to the 2% target without a recession or a major spike in unemployment, that is, you know, it's pulled off kind of a minor economic miracle. That said, though, you know, so far, so good. Inflation is falling. The economy has held strong. But history is a powerful indicator. And we are seeing some signs that businesses are selling less. And, of course, layoffs have been happening. But hopefully the U.S. can be the exception that proves the moderate inflation rule.

SHAPIRO: NPR's Stacey Vanek Smith. Thank you.

SMITH: Thanks, Ari.

(SOUNDBITE OF MELANIE MARTINEZ SONG, "VOID") Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Stacey Vanek Smith is the co-host of NPR's The Indicator from Planet Money. She's also a correspondent for Planet Money, where she covers business and economics. In this role, Smith has followed economic stories down the muddy back roads of Oklahoma to buy 100 barrels of oil; she's traveled to Pune, India, to track down the man who pitched the country's dramatic currency devaluation to the prime minister; and she's spoken with a North Korean woman who made a small fortune smuggling artificial sweetener in from China.