What Is the Current US Inflation Rate?
The inflation rate is an important economic indicator because it tells you how quickly prices are changing. It's measured by the Consumer Price Index (CPI) and reported by the Bureau of Labor Statistics (BLS) each month.
The unadjusted US inflation rate increased 0.3% in April 2022, slightly dipping year-over-year inflation to 8.3%. Used car sales have seen an astounding rise in prices; over the past 12 months, prices have increased by 22.7%.
Food, shelter, transportation, and medical services increased month-over-month in April. Gas prices decreased 0.8% in April after a huge spike in March
What
Is the Inflation Target?
The core inflation rate excludes the impact of volatile oil and food prices and is often tracked on a year-over-year basis. It was up by 6.2% annually and 0.6% in April 2022.2 That's much higher than the 2% target that the Federal Reserve says is needed to maintain a healthy economy. The Fed claims that core inflation at a level of 2% is healthy.
Interest rates would also remain low if inflation expectations consistently stay below the target rate. There would be less room to cut interest rates to boost employment during an economic downturn as a result.
The Fed announced on March 16, 2022, that it
would raise interest rates for the first time since 2018. The federal funds
rate was increased by 25 basis points or .25%, raising the target range from 0
to 25 basis points to 25 to 50 basis points in response to rising inflation.
The Federal Open Markets Committee has indicated that it plans to continue increasing the rate throughout 2022 to help control inflation.
How
the Current Inflation Rate Affects You
The inflation rate hovered just below the healthy range for quite some time, but in early 2022 it was rising enough above an unhealthy rate to cause some businesses and investors to worry.
The Federal Reserve works to keep inflation healthy, but it takes time for the tools to work. Inflation also creates various situations for consumers regarding how much they can afford and will spend. Here's a look at what happens at the three ends of the scale regarding deflation, healthy inflation, and hyperinflation.
Deflation
Falling prices warn of deflation. This may seem like a great thing for shoppers, but deflation often signals an impending recession. With a recession come declining wages, job losses, and big hits to most investment portfolios. As a recession worsens, so does deflation. Businesses lower their prices in desperate attempts to get consumers to buy their products and services. Deflation is worse than inflation, because it signals falling demand.
The Federal Reserve combats deflation with expansionary monetary policy. It reduces the federal funds rate range to influence consumers to spend and banks to loan.
Healthy Inflation
Moderate inflation of around 2% is actually good for economic growth. Consumers are more likely to buy now rather than wait when they expect prices to rise. This spurs demand, driving prices higher. Inflation is a self-fulfilling prophecy.
The FOMC reviews the core inflation rate (all goods less food and energy) when it decides whether to raise the fed funds rate range. The Fed uses expansionary monetary policy by lowering its administered rates when the rate is lower than the 2% target. It lowers the fed funds rate range to boost economic growth to prevent or end a recession.
The Fed uses contractionary monetary policy when it considers inflation to be rising too quickly. It raises administered rates to keep prices from rising more rapidly than your paycheck. Higher interest rates weaken consumer demand by making loans more expensive. That slows growth, reducing the economy's ability to create jobs.
Hyperinflation
People sometimes worry that inflation will skyrocket, causing hyperinflation. They're concerned that price increases could be like those seen during the Weimar Republic in Germany. Hyperinflation is very rare because it means that prices are rising by 50% per month.
BLS Inflation Calculator
The BLS inflation calculator shows how inflation eats away at your purchasing power. A 2.5% inflation rate means that something that cost $100 last year would cost $102.50 this year. It also means that you'd need a 2.5% raise just to stay even. A hard-earned 3.5% raise would only be worth 1.0% in additional buying power in this situation.
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