What Is the Current US Inflation Rate?

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The current U.S. inflation rate as of March 2021 is 0.6%. That means consumer prices increased from February. The inflation rate is an important economic indicator because it tells you how fast prices are changing. It's measured by the Consumer Price Index which is reported by the Bureau of Labor Statistics (BLS) each month.

The increase was driven by a 9.1% increase in gasoline. Natural gas also increased, as did food at home and food away from home.

The price of used cars and trucks increased 0.5%. This is the first increase after four months of declines.

The prices of prescription drugs increased 0.1%, while the cost of medical care services rose 0.1%. Housing costs increased 0.3% from February 2021. With the ability to work from home or remotely from anywhere, the pandemic has given people a reason to leave cities and move out to the suburbs, but that seems to be slowing down. In February, home sales fell by 10.6% and experienced their first year-over-year decrease in eight months.

What Is the Inflation Target?

The core inflation rate—which excludes the impact of volatile oil and food prices and is often tracked on a year-over-year basis—was 1.6%, meaning prices rose 1.6% in the past 12 months. It's lower than the 2% target the Federal Reserve says is needed for the health of the economy.

Besides the core rate in the CPI report, the Federal Reserve looks at the Personal Consumption Expenditures (PCE) report because it’s considered more reflective of true underlying inflation trends. The PCE core inflation rate was 1.4% year-over-year in February, the latest month available.

In March, the Fed’s Federal Open Market Committee (FOMC) reinforced its plan not to raise the target for the fed funds rate, currently at a range of 0% and 0.25%, anytime soon. In its August 2020 meeting, it announced it would allow inflation to rise above 2% if that would ensure maximum employment.

How the Current Inflation Rate Affects You

The current inflation rate has been hovering just below the healthy range for quite some time. Demand is too sluggish to drive prices higher. Here's a look at what happens at the three ends of the scale: deflation, healthy inflation, and hyperinflation.

Deflation

Falling prices warn of deflation. While this may seem like a great thing for shoppers, deflation often signals an impending recession. With a recession comes declining wages, job losses, and big hits to most investment portfolios. As a recession worsens, so does deflation. Businesses hawk ever-lower prices in desperate attempts to get consumers to buy their products and services.

The Federal Reserve combats deflation with expansionary monetary policy. It reduces the fed funds rate target. Once rates have hit zero, it must use other tools, such as reducing reserve requirements for banks or buying and selling government securities.

Deflation is worse than inflation because it signals falling demand.

As long as businesses and people feel less wealthy, they spend less, reducing demand further. They don't care if interest rates are 0% because they aren't borrowing anyway. There's too much liquidity, but it does no good. That situation is called a liquidity trap and is a vicious, downward spiral.

Healthy Inflation

Moderate inflation of around 2% is actually good for economic growth. When consumers expect prices to rise, they are more likely to buy now, rather than wait. This spurs demand, driving prices higher. In other words, inflation is a self-fulfilling prophecy. 

 Inflation is usually driven by expectations of rising prices.

The FOMC reviews the core inflation rate when it decides whether to raise the fed funds rate. When the rate is lower than the 2% target, the Fed uses expansionary monetary policy. It lowers the fed funds rate to boost economic growth. That's done to prevent, or end, a recession.  

When the Fed considers inflation to be a threat, it uses contractionary monetary policy. It raises rates to keep prices from rising faster 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

Sometimes people worry that inflation will skyrocket, causing hyperinflation. They are concerned that price increases could be like that seen during the Weimar Republic in Germany. When that happens, gold bugs can cause a rally in the precious metal as a hedge. Hyperinflation is very rare since it means prices are rising by 50% a month. 

BLS Inflation Calculator

The BLS inflation calculator quickly shows how inflation eats away at your purchasing power. For example, a 2.5% inflation rate means that something that cost $100 last year now costs $102.50. It also means you need a 2.5% raise just to stay even. In that situation, a hard-earned 3.5% raise would only be worth 1.0% in additional buying power.

Key Takeaways

  • Consumer prices increased 0.6% in March after increasing 0.4% in February.
  • The increase was primarily driven by a 9.1% increase in gasoline prices.
  • Prices for natural gas, food at home, and food away from home all increased in March.