What Is the Current U.S. Inflation Rate?

Consumer shopping for groceries, comparing fruit
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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 U.S. 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. 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 Federal Reserve looks at the Personal Consumption Expenditures (PCE) report in addition to the core rate in the CPI report because it’s considered more reflective of true underlying inflation trends. The core inflation rate, which excludes more volatile food and energy prices, held steady at 0.3% for the third month in a row in April.

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.

When the current rate of inflation creeps higher, you pay more for many items. The war between Russia and Ukraine heightened gas prices that were already inflated.

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.

Inflation is usually driven by expectations of rising prices by consumers, investors, and businesses.

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.

Key Takeaways

  • Consumer prices increased 1.2% in March 2022.
  • The increase was driven primarily by increased prices for fuel. Gas prices increased by 18.3% in March.
  • Prices for food, apparel, used cars, and transportation also increased in March.
  • Year-over-year inflation increased to 8.5% in March 2022, the highest rate since 1982.

Frequently Asked Questions (FAQs)

How do you hedge your portfolio against inflation?

Some investors attempt to protect their portfolios from inflation by strategically allocating their funds. Gold, Treasury Inflation-Protected Securities (TIPS), and stocks are among the most common inflation hedges. But these assets don't always succeed in protecting investors, and investments can lose value at a faster rate than inflation.

When does cost-push inflation occur?

Cost-push inflation occurs when supplier costs increase. Suppliers pass cost increases on to customers if commodity costs or wages rise, which increases prices throughout the economy. Cost-push is one of the two primary types of inflation along with demand-pull. Demand-pull inflation occurs when consumer demand increases, such as when strong economic performance encourages consumers to spend money rather than save.

Article Sources

  1. U.S. Bureau of Labor Statistics. "Consumer Price Index," Pages 1, 8.

  2. U.S. Bureau of Labor Statistics. "Consumer Price Index," Pages 1, 4, 11.

  3. Board of Governors of the Federal Reserve System. "Comparing Two Measures of Core Inflation: PCE Excluding Food & Energy vs. the Trimmed Mean PCE Index."

  4. U.S. Bureau of Economic Analysis. "Personal Income and Outlays."

  5. Board of Governors of the Federal Reserve System. "Open Market Operations."

  6. Board of Governors of the Federal Reserve System. "Federal Reserve Issues FOMC Statement, March 16, 2022."