Fidelity strategists believe inflation could linger far longer than anyone anticipated even just a month ago.

Collin Crownover, the lead inflation analyst on Fidelity’s asset allocation research team, believes that inflation might continue to hover around or above 3% over both the near term and longer term as inflationary pressures persist, he said in a recent blog.

While inflation has come down significantly since its dramatic peak in June of 2022, when it headed into double-digit territory for the first time in more than a decade, progress in reducing escalating prices has also slowed.

Where does inflation go from here and is the low-inflation era gone for good?

“I think inflation may get down to around 3% by the middle of this year, but then could actually tick up slightly in the second half of the year. Into next year, I think inflation could stay persistently above 3%,” Crownover said.

At the end of the day, it’s important to remember that the U.S. has had 3% inflation before “and it’s been fine. In fact, the long-run historical norm has actually been closer to 3% than the 2% experienced for, say, the couple of decades before the pandemic. But it does require an adjustment for people. You have to start thinking about inflation more when it’s at 3% than you do when it’s 2%,” Crownover warned. For much of the pre-financial crisis period between 1990 and 2007, inflation averaged between 2.5% and 3.0%.

One of the key drivers fueling his estimate is the fact that the U.S. has not only not seen a recession, but hasn’t even gotten close. As a result, continued robust growth is a key factor behind inflation’s staying power, he said. Unemployment has also remained low by historical standards, though it has risen from its recent lows, he added.

“My favorite measure for looking at wage growth—the Atlanta Fed’s wage growth tracker—has still been running at close to 5%. It’s hard to square the circle of wages going up by 5% but inflation actually coming down to 2%,” Crownover aid.

While a year ago consensus thinking told us a recession was on the way, now most measures indicate the U.S. has avoided that fate.  What does that mean for inflation going forward and is the long-telegraphed soft landing still coming?

That has yet to be settled, Crownover said, noting that monetary policy actions—especially rate hikes—can take a very long time to impact the real economy. It hasn’t even been a year since the Fed’s last rate hike, he noted.

“You could make a plausible argument that it’s going to take even longer this time because so many people aren’t affected by higher interest rates ... day to day because they’ve locked in 30-year mortgages at 3% interest rates,” he said.

Overall, Crownover said that inflation might level out a bit higher than 3%. But that’s not a given and there are events that could lower inflation, he said.

Among them are if the U.S. economy runs into trouble and does see a recession, it could bring inflation lower, he noted.

Another issue that could pull inflation lower is China’s reaction to the downturn in its real estate market, which has been to pump up manufacturing with the goal of increasing exports, Crownover said. “An increase in the supply of goods from China could create some deflationary pressures [in the U.S.],” he added.

In contrast, there are factors that could lead to higher than anticipated inflation. “There's a lot of evidence from investors’ and consumers’ behavior that financial conditions aren’t actually very restrictive,” Crownover said.

Does that mean 3% is the new normal and that inflation is a long-term economic factor?

“There are some inflationary longer-term trends that might keep us at closer to 3% rather than 2%,” Crownover said. Economic woes, the aging U.S.population and lowered consumer spending are factors that could cause demand to pull back and prices to fall with it, he said.

On the flip side, consumers are expecting inflation, he said. “Consumers’ long-run inflation expectations are higher. Inflation can be a self-fulfilling prophecy. If I expect inflation to be higher I’m going to demand higher wages—if I can. That can create a feedback loop,” he said.