A routine grocery run illustrates the persistent inflation challenge facing the U.S. economy. A 12-pack of Coca-Cola, which not long ago sold at three for $10 on promotion, recently cost $11.99 at a warehouse club — with no comparable deal in sight. Whether that earlier promotion was an anomaly or companies have fundamentally recalibrated their pricing strategies, the sticker shock reflects a broader pattern: prices that rose during the COVID-era supply chain disruptions have largely stayed elevated even as supply chains have normalized.

Annual year-over-year price increases tell the story:

• 2021: +4.7%
• 2022: +8.0%
• 2023: +4.1%
• 2024: +2.9%
• 2025: +2.6%

Cumulatively, the price index has risen more than 22% since the end of 2020, well above the Federal Reserve's 2% inflation target. That means a dollar today buys roughly 18 cents less in goods and services than it did five years ago — a erosion that wages have only partially offset for many households.

Higher prices have benefited corporate earnings and, by extension, equity markets. Coca-Cola, for instance, reported better-than-expected earnings and revenue this week, and its stock has gained more than 28% year to date. The performance raises a critical question: are companies growing because they are selling more units, or because they are charging more per unit? Across the consumer staples sector, multiple companies have posted revenue growth driven primarily by price increases rather than volume gains in recent quarters.

The sticky nature of price increases compounds the problem. A COVID-driven spike may have been understandable amid the crisis, but once the shock dissipated, at least some of those increases might have been expected to reverse. Inflation tends to feed on itself: consumers grow accustomed to paying more, companies grow accustomed to charging more, and investors reward the resulting earnings growth — reinforcing the cycle.

Kevin Warsh's Arrival and the Fed's Message

Kevin Warsh, who previously served as a Federal Reserve Board governor from 2006 to 2011 under Chairmen Ben Bernanke and Alan Greenspan, has returned to the central bank in a new capacity, bringing what he characterized as a fresh perspective and a stark conclusion: "Inflation has not been broken."

The Federal Reserve's latest policy statement was brief but pointed. The final line served as an unmistakable mission statement. The full statement read:

"The Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, in support of the Federal Reserve's dual mandate. The Committee reaffirmed its policy of maintaining ample reserves in the banking system.

Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.

Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability."

The decision to hold rates steady keeps borrowing costs at levels that continue to ripple through the economy — from mortgage rates and auto loan payments to corporate debt servicing and credit card interest. The reference to ample reserves signals the Fed's continued reliance on the post-2008 framework, in which it manages interest rates primarily through the interest it pays on bank reserves rather than by shrinking the supply of reserves directly.

Supply Shocks vs. Pricing Behavior

A portion of current inflation can be attributed to genuine supply shocks. Energy prices and transportation costs matter. But the question is whether companies are continuing to push prices higher simply because consumers have grown accustomed to paying them. A jump in oil prices may justify higher costs at the pump, but it is less clear that it justifies a $12 12-pack of soda.

The Federal Reserve cannot lower the price of oil, negotiate grocery prices, or dictate what companies charge. What it can do is attempt to slow demand sufficiently to restore price stability — and, perhaps more significantly, shift inflation psychology. If consumers begin resisting higher prices and businesses start worrying more about losing sales than expanding margins, pricing power could start to shift back toward buyers. Early signs of such a shift have appeared in scattered categories where discount retailers have reported increased foot traffic, but the broader data remains mixed.

That is easier stated than accomplished. Once prices rise, they rarely retreat. The real test is not whether the Fed can restore Coca-Cola to three 12-packs for $10, but whether it can break the expectation that prices must increase every year. Success on that front could prove to be Warsh's defining accomplishment. Failure would mean consumers continue to experience inflation as a daily reality long after official measures suggest it has been contained.

Last month marked a discernible shift in the Federal Reserve's posture. The open question now is how far the central bank is prepared to go.