Inflation Isn’t Done Yet: Why Markets, the Fed, and Consumers Are Still Wrestling With Sticky Prices

Financial markets are eager for relief. Investors are pricing in at least one interest rate cut by the Federal Reserve before year-end. Equity markets are hovering near all-time highs. And yet, the inflation story is far from over — and the road to monetary easing is filled with friction.

The Fed held interest rates steady at its March meeting, keeping the federal funds target range at 4.25%–4.50%. But the messaging was clear: inflation is still running above target, and the path forward is complicated by resurgent tariff policies, a still-hot labor market, and the federal government’s mounting fiscal burden.

While inflation has come down meaningfully from its 2022 peak, it hasn’t gone away. And a look under the hood shows why the Fed isn’t ready to pivot — and why the market may be misreading just how tricky this inflation cycle remains.

Despite tighter financial conditions, the labor market continues to defy gravity. February’s jobs report showed 215,000 payrolls added, outpacing expectations. The unemployment rate rose slightly to 3.9% — still historically low.

Wages, too, remain elevated. Average hourly earnings are growing at 4.3% year-over-year, well above the roughly 3.5% pace most economists associate with 2% inflation. Service-sector roles in hospitality, healthcare, and logistics continue to experience acute wage pressures.

Fed Chair Jerome Powell acknowledged this at the March press conference: “We’re seeing slower inflation, but wage growth and services inflation remain areas of concern. The labor market’s strength is both a blessing and a challenge.”

This strength is keeping core services inflation sticky — and gives the Fed less urgency to cut.

Complicating the Fed’s job further is a fresh wave of tariff threats from the Trump administration. A proposed 60% blanket tariff on Chinese imports, alongside targeted duties on EVs, steel, semiconductors, and other industrial inputs, is poised to inject new price pressures into the economy.

This type of cost-push inflation is largely immune to rate policy. If companies pass higher import costs on to consumers, the Fed may have no choice but to delay cuts — or risk appearing complacent in the face of rising prices.

The Atlanta Fed’s Raphael Bostic recently reduced his forecast from two cuts to just one in 2025, citing “a risk of reacceleration in prices” due to trade policy.

Even as the market talks about cuts, Treasury yields tell a different story. The 10-year note remains anchored above 4.2%, a sign that investors don’t yet see inflation sustainably declining — or that they’re beginning to price in another concern: the growing federal deficit.

The Congressional Budget Office recently warned that extending the 2017 Trump tax cuts without offsetting spending reductions could add more than $4 trillion to the deficit over the next decade. With debt service costs rising and the Treasury issuing more debt to cover spending, demand for higher yields could persist — especially if inflation remains sticky.

Top-line inflation has cooled — but here’s what’s kept it from falling further:

Shelter remains the largest single driver of core inflation. Due to lags in rent measurement, official CPI data is only now reflecting rental disinflation that began over a year ago. But with mortgage rates still high and housing supply tight, a broad cooldown remains elusive.

Core services — particularly in labor-intensive sectors like healthcare, personal care, and travel — are proving the stickiest. This segment is most tightly tied to wage growth and remains a top concern for policymakers.

After easing through much of 2023, energy prices have rebounded slightly in 2025 due to OPEC+ supply discipline and geopolitical tensions. While not spiking, oil and gas prices are no longer providing disinflationary tailwinds.

Durable goods inflation has cooled significantly. Used car prices are off their highs, and many household items have seen outright deflation. But this could reverse if new tariffs hit supply chains again.

Grocery price increases have slowed, but food remains expensive in absolute terms. Restaurant and food-away-from-home prices are still rising due to labor and overhead costs.

It’s important to remember: even if inflation is slowing, the price level — the cumulative cost of living — remains significantly higher than it was just a few years ago. A gallon of milk, a new car, or a rent payment might not be rising as fast, but they’re still well above pre-2021 levels.

That disconnect is why consumer sentiment remains fragile, and why even a 3% inflation rate may still feel punishing for many Americans.

Markets are eager to turn the page. The S&P 500 is near record highs, fueled by strength in tech and an expectation that the Fed will cut at least once in 2025. But fund managers are increasingly cautious: 71% surveyed by Bank of America expect stagflation to be the dominant theme over the next 12 months.

The Fed is trying to thread the needle — recognizing progress while staying vigilant. Its message: we’re getting closer, but we’re not there yet.

Inflation is no longer the runaway threat it was in 2022 — but it’s not in the rearview mirror either. With wage pressures, tariff risks, elevated yields, and structural fiscal concerns, the Fed is walking a tightrope.

Investors looking ahead would be wise to respect that balance — and prepare for a more nuanced, data-driven policy environment than the rate-cut cheerleading might suggest.