Inflation in the United States continues to rise, presenting ongoing challenges just weeks ahead of the midterm elections. The Consumer Price Index (CPI) recently showed a 0.4% increase over the past month and a 3.4% rise over the last year, well above the Federal Reserve’s long-term target of 2%. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures Price Index (PCE), similarly reflects persistent inflationary pressure.

Contributing to these price increases are elevated oil and gas costs driven in part by geopolitical tensions, including developments in Iran. While these factors play a role, broader inflationary trends have eroded purchasing power for many Americans over several years.

A recent study from the National Bureau of Economic Research analyzed payroll records for approximately 16 million workers from 2021 through 2024. It found that during inflation’s peak at 9% in 2022, most firms granted standard cost-of-living raises averaging 3%. As a result, 43% of workers who remained with the same employer experienced real wage declines, with 37% of all workers studied seeing reductions in inflation-adjusted income. Although aggregate real wages have since rebounded, the initial losses have not been fully recovered.

Despite inflation’s impact on voters, policymakers in Washington appear reliant on the Federal Reserve to quell inflation through interest rate hikes. The Fed recently increased rates by 0.25 percentage points to a range of 3.75% to 4%, reaffirming its commitment to the 2% inflation target under Chairman Kevin Warsh. However, experts warn that monetary policy alone is insufficient.

Fiscal policy also plays a critical role in addressing inflation. Without fiscal restraint, higher interest rates raise the government’s debt servicing costs, increasing borrowing and fueling further inflationary pressures. This dynamic creates a feedback loop that monetary policy cannot fully control without Congressional support.

Historical precedent underscores this point. Former Fed Chairman Paul Volcker’s success in reducing inflation during the 1980s was reinforced by Congressional actions, including the Tax Equity and Fiscal Responsibility Act of 1982, Social Security reform in 1983, and tax reform in 1986. These measures shaped market expectations around fiscal discipline, which helped anchor inflationary expectations despite sizable budget deficits at the time.

Currently, deficits remain elevated, running near 6% of GDP compared to a benchmark level of about 3% previously achieved by Congress. Experts like Parker Sheppard, senior fellow at the Fiscal Lab on Capitol Hill, call for legislation committing to credible deficit targets and improved transparency. One proposal is for the Congressional Budget Office to incorporate debt service costs into budget scores, as current scoring often allows delayed offsets that obscure the true cost of borrowing.

Improving economic growth through regulatory reforms that encourage investment and workforce participation may also aid fiscal sustainability and reduce inflationary pressures by expanding revenue capacity. However, long-term solutions will likely require reforming entitlement programs such as Social Security and Medicare, which constitute around 70% of mandatory federal spending and are projected to drive future deficits.

While the Federal Reserve continues to adjust monetary policy in pursuit of lower inflation, economists stress that Congressional action on fiscal policy and entitlement reform is essential for a sustainable resolution to inflation concerns. The message is clear: fighting inflation will require coordinated efforts beyond the central bank’s tools.