Current US Inflation Rate Statistics and News

Explanation and the Monthly Inflation Rate Statistics Since January 2007

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The current inflation rate was -0.1% in May 2020 according to the Consumer Price Index Summary. The coronavirus pandemic sharply reduced demand as state governments ordered shelter-in-place orders. As a result, the prices of most goods and services fell.

Gasoline prices fell by 3.5% due to a drop in oil prices. In 2019, oil prices made up 54% of gas prices. The Energy Information Administration's oil price forecast fell to $38 a barrel for 2020 and $48/b for 2021. 

The prices of used cars and trucks fell by 0.4%, while new vehicle prices rose 0.3%. Transportation services fell by 3.6% as ridership dropped.

In the last 12 months, the cost of health care services rose by 5.9%. Drug prices also rose by 0.8% during that time. Health care costs have risen more slowly since Obamacare took effect in 2014. Before that, prices rose by 7% to 8% a year

Current Core Inflation Rate

The core inflation rate was 1.2% year over year. The core rate eliminates the impact of volatile oil and food prices. Their prices change daily because they're based upon commodities trading.

Oil prices also tend to rise in the spring in anticipation of higher demand from summer vacationers. High oil prices increase the prices of fertilizer and transportation costs. That creates high food prices

The core rate was below the Federal Reserve's 2% inflation target. The Federal Open Market Committee lowered the fed funds rate to a range between 0% and 0.25% in an emergency meeting on March 15, 2020.

In January 2012, the Fed switched to the Personal Consumption Expenditures to measure inflation. The Fed considers it to be more reflective of true underlying inflation trends. Its core inflation rate was 1.7% year-over-year as of March 2020, below the Fed's target.

How the Current Inflation Rate Affects You

The inflation rate is an important economic indicator. It tells you how fast prices are changing in the current phase of the business cycle

It's measured by the Consumer Price Index which is reported by the Bureau of Labor Statistics each month.

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 combat deflation with expansionary monetary policy. It reduces the fed funds rate target. Once rates have hit zero, it must use other tools.

Deflation is worse than inflation because interest rates can only be lowered to zero.

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

Healthy Inflation

Moderate inflation is actually good for economic growth. When consumers expect prices to rise, they are more likely to buy now, rather than wait. This increases demand.  As pointed out by former Fed Chair Ben Bernanke inflation is usually driven by expectations of inflation. This means that, if people and investors think prices will go up, they will buy things now, increasing demand and actually driving the prices further up. In other words, inflation is a self-fulfilling prophecy. 

The Federal Open Market Committee reviews the core inflation rate when it decides at its eight FOMC meetings whether to raise the fed funds rate. The Federal Reserve set a target rate of 2% for the core rate. When the rate is lower than the target, the Fed may use expansionary monetary policy. It will lower the fed funds rate to boost economic growth. That's done to prevent any possible recession.  

When the rate is higher than the 2% target, the Fed uses contractionary monetary policy. It raises rates to keep prices from rising faster than your paycheck. Some critics worry that higher interest rates would weaken consumer demand. That would slow economic growth, reducing its ability to create jobs.

Hyperinflation

Some 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. But to have hyperinflation, prices must rise 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. Not to make you feel bad, but if you were celebrating your hard-earned 3.5% raise, thanks to inflation it is really only worth 1.0% in additional buying power.

Article Sources

  1. U.S. Bureau of Labor Statistics. "Consumer Price Index Summary." Accessed June 15, 2020.

  2. U.S. Energy Information Administration (EIA). "Factors Affecting Gasoline Prices." Accessed June 15, 2020.

  3. U.S. Energy Information Administration. “Forecast Highlights.” Accessed June 15, 2020.

  4. Board of Governors of the Federal Reserve System. "Federal Reserves Issues FOMC Statement." Accessed May 16, 2020.

  5. Bureau of Economic Analysis. "Personal Income and Outlays," Use "Price indexes, Percent Change from Month One Year Ago," PCE, excluding food and energy. Accessed June 15 2020.