Five Facts On Inflation

Inflation has been low in the U.S. for decades. But amid a rebounding economy and a new burst of spending from Washington, some economists are raising concern about the prospect of rising prices.

Here are five facts on inflation:

  1. The Federal Reserve defines inflation as the “increase in the prices of goods and services over time.”

Each month, the Bureau of Labor Statistics (BLS) releases the Consumer Price Index (CPI), the most widely cited measure of inflation. To calculate it, BLS assigns 400 people to collect nearly 80,000 prices of everyday household goods. The Federal Reserve uses the Personal Consumption Expenditures (PCE) from the Bureau of Economic Analysis, which uses many of the same data points as BLS but frames it in the context of Gross Domestic Product.

 

  1. Inflation can be caused by many factors, including “too many dollars chasing too few goods.”

Inflation can occur when there is too much aggregate demand in the economy, which is often a consequence of a strong economy and low unemployment. But many economists also believe that inflation can be caused by increased government spending and interest rates being too low for too long, which can spur the issuance of too much debt and too much overinvestment.

  1. The inflation rate for the 12 months ending January 2021 was 1.4%.

Even though the current inflation rate is relatively low, some goods, such as gas, have seen their price rise significantly in the past year. With an accelerating economy and the new $1.9 trillion COVID relief package singed into law, Moody’s lead economist Mark Zandi says he believes that “inflationary pressures will develop very quickly.”

  1. The Federal Reserve uses the federal funds rate to modulate inflation.

According to The Balance, “The fed funds rate is the interest rate banks pay for overnight borrowing in the federal funds market. The Federal Reserve uses it to influence other interest rates, such as credit cards, mortgages, and bank loans. It also affects the value of the U.S. dollar and other household and business assets. Historically, the Fed has raised the federal funds rate to combat inflation, with a notable example being former Fed Chair Paul Volcker increasing the federal funds rate to 20% in March 1980.

  1. The Federal Reserve adopted an inflation target of 2% in 2012 following the global financial crisis.

The Federal Reserve has a dual mandate from Congress: to achieve maximum employment and stable prices. The Fed believes that 2% inflation in the long run will help them meet this mandate most effectively. Recently the Fed has shifted its primary concern to achieving  full employment, with Chairman Jay Powell saying in a recent speech that, “My colleagues and I are strongly committed to doing all we can to promote [the Fed’s] employment goal.”

This article first appeared on Real Clear Politics

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