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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