What Is the Current US Inflation Rate?

Consumer shopping for groceries
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The U.S. inflation rate as of August 2021 was 5.3% compared to a year earlier. That means consumer prices increased by 5.3% over a year. 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), reported by the Bureau of Labor Statistics (BLS) each month.

The increase was driven by a 2.8% increase in gasoline, a 1.2% increase in new car prices, and a 1.6% increase in utility gas services.

The prices of prescription drugs and medical equipment decreased 0.2% from July, while the cost of medical care services rose .3%. With the ability to work from home or remotely from anywhere, the pandemic gave people a reason to leave cities and move out to the suburbs. Although this slowed in early 2021, pending home sales rebounded by 8.1% in August.

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 up 4.0%, meaning that those prices rose 4.0% over the last 12 months. It's higher than the 2% target the Federal Reserve says is needed for the economy's health, but is in line with the current monetary policy target of reaching an average of 2% inflation over time.

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 3.6% year-over-year in July.

In July, the Fed’s Federal Open Market Committee (FOMC) reinforced its plan not to raise the target for the fed funds rate, currently set at a range of 0% to 0.25%, anytime soon.

How the Current Inflation Rate Affects You

While the inflation rate hovered just below the healthy range for quite some time, it is rising enough above an unhealthy rate to cause some businesses and investors to worry. However, the Federal Reserve maintains that the current high inflation rate is transitory and will come down to more manageable levels.

The current rate of inflation is creeping higher. This means that you're paying more for many items. Only a few sectors and subsectors experienced a decrease in price over August—these were transportation services, fuel oil, dairy, used vehicles, and medical commodities.

The Federal Reserve works to keep inflation healthy, but it takes time for its tools to work. In addition, inflation 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. While this may seem like a great thing for shoppers, 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 offer ever-lowering 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 federal funds rate. 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 and reduce demand further. They don't care if interest rates are 0% because they aren't borrowing money. There's too much liquidity (where everyone holds on to their cash), and no one is spending either. 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 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 are concerned that price increases could be like those seen during the Weimar Republic in Germany. Hyperinflation is very rare since 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. For example, a 2.5% inflation rate means that something that cost $100 last year would cost $102.50 this year. It also means that 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 .3% in August after increasing 0.5% in July.
  • The increase was primarily driven by increased prices for gasoline, gas services, and new cars.
  • Prices for food and energy also increased in August.