What Is the Current US Inflation Rate?
The current U.S. inflation rate as of December 2020 is 0.4%. That means consumer prices increased from November. 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 primarily by an 8.4% increase in gasoline, which accounted for more than 60% of the increase in inflation.
Apparel prices increased by 1.4%. The price of used cars and trucks fell 1.2%. This is the third straight month of declines after an astonishing 6.7% increase in September. With low interest rates, demand for used vehicles has skyrocketed in recent months.
The prices of prescription drugs fell 0.4%, while the cost of hospital services rose 0.3%. The cost of physician services is unchanged from November. Although the pandemic has overburdened hospitals with COVID-19 patients, other types of preventative care are being postponed.
Housing costs rose 0.1%, which was no different than the rates seen in August, September, October, and November 2020. 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. Home prices and sales declined in November, and the supply of homes for sale declined as well.
Consumer prices had been gradually recovering from the slump in demand triggered by the COVID-19 pandemic, but the pace of inflation has slowed significantly since the beginning of the summer, an unwelcome signal of a languishing economy. In December, the inflation rate was the second-highest increase since May, when there was slight deflation.
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. That’s the same inflation rate as October and November. It's also 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 November—the latest month available.
In November, 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 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.
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.
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.
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.
- Consumer prices increased 0.4% in December after increasing 0.2% in November.
- The increase was primarily driven by an 8.4% increase in gasoline prices.
- Softening prices signal weak demand as consumers continue to be pummeled by the COVID-19 pandemic.
U.S. Bureau of Labor Statistics. "Consumer Price Index Summary." Accessed Jan. 13, 2021.
National Association of Realtors. "Existing-Home Sales Decrease 2.5% in November." Accessed Jan. 13, 2021
Bureau of Economic Analysis. "Personal Income and Outlays, November 2020." Accessed Jan. 13, 2021.
Board of Governors of the Federal Reserve System. "Federal Reserve Issues FOMC Statement, Nov. 5, 2020." Accessed Jan. 13, 2021.
Board of Governors of the Federal Reserve System. "Federal Open Market Committee Announces Approval of Updates to its Statement on Longer-Run Goals and Monetary Policy Strategy." Accessed Jan. 13, 2021.
Federal Reserve Bank of St. Louis. "How Monetary Policy Works." Accessed Jan. 13, 2021.
Lumen Learning OER Services. "The Weimar Republic." Accessed Jan. 13, 2021.
U.S. Bureau of Labor Statistics. “CPI Inflation Calculator.” Accessed Jan. 13, 2021.