What Is the Current US Inflation Rate?

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The U.S. inflation rate as of June 2021 was 5.4% compared to a year earlier. That means consumer prices increased by 5.4% over the course of a year—the sharpest such increase since August 2008. 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), which is reported by the Bureau of Labor Statistics (BLS) each month.

The increase was driven by a 10.5% increase in the price of used cars and trucks. The energy index also increased.

The prices of prescription drugs decreased 0.4% from May, while the cost of medical care services was unchanged. Housing costs increased 0.5% from May 2021. With the ability to work from home or remotely from anywhere, the pandemic had given people a reason to leave cities and move out to the suburbs, but that slowed down in early 2021. Home sales dropped by 4.4% in April but increased 8.0% in May.

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 5.4%, meaning that prices rose 5.4% in the past 12 months. It's higher 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 3.4% year-over-year in May, the latest month available.

In June, 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% to 0.25%, anytime soon. In its August 2020 meeting, the Fed announced that it would allow inflation to rise above 2% if that would ensure maximum employment.

The Federal Open Market Committee will hold its July 2021 meeting on July 27 and 28.

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 come declining wages, job losses, and big hits to most investment portfolios. As a recession worsens, so does deflation. Businesses offer 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 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 now costs $102.50. 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 0.9% in June after increasing 0.6% in May.
  • The increase was primarily driven by a 10.5% increase in used car and truck prices.
  • Prices for food and energy also increased in June.