What Is the Current U.S. Inflation Rate?

Consumer shopping for groceries
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The U.S. inflation rate as of October 2021 was 6.2% compared to a year earlier. That means consumer prices increased by 6.2% 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.

Energy was the biggest contributor to the annual increase in inflation (30%)—of that, gasoline, fuel oil, and energy services experienced the largest year-over-year changes. Medical care, new and used car sales, and shelter prices also increased.

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 4.6%, which means those prices rose 4.6% over the last 12 months. That is higher than the 2% target that the Federal Reserve says is needed to maintain a healthy economy, but it 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 September.

In November, the Federal Open Market Committee (FOMC) reinforced its plan not to raise the target for the fed funds rate range, currently set at 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, which means that you're paying more for many items. Only a few sectors and subsectors experienced a decrease in price over October—these were alcolic beverages and airline fares.

The Federal Reserve works to keep inflation healthy, but it takes time for the 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 range to influence consumers to spend and banks to loan.

Deflation is worse than inflation, because it signals falling demand.

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. That spurs demand, driving prices higher. In other words, inflation is a self-fulfilling prophecy.

The FOMC reviews the core inflation rate (all good less food and energy) when it decides whether to raise the fed funds rate range. When the rate is lower than the 2% target, the Fed uses expansionary monetary policy by lowering its administered rates. It lowers the fed funds rate range to boost economic growth. That's done to prevent or end a recession.

When the Fed considers inflation to rising too quickly, it uses contractionary monetary policy. 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 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 .9% in October after increasing 0.4% in September.
  • The increase was primarily driven by increased prices for new and used cars, energy, shelter, household furnishings, medical care.
  • Prices for food and energy also increased in October.