Putting Inflation in Context
How do we define and measure inflation?
Prices have risen at rates we haven't seen since the late 1970s. Consumers—as well as market participants and policymakers—expect inflation to be well above the Federal Reserve's 2% target through at least 2023.
But it's important to first have our definitions in order:
Inflation measures the rate of change of a price index over time.
And a price index measures the average price of a collection of goods and services.
It's also important to know that price indexes (like the CPI and PPI from the BLS and the PCE from the BEA) capture consumer prices in different ways: different items, different weights or emphasis on each item, and different schedules for updating what's included.
What's up with gas prices?
One clear and present example of inflation is gasoline prices, which have risen faster than overall inflation for decades: Average annual CPI inflation from 1990 to 2021 was 2.4%, while average annual gasoline price inflation was 3.9%. Gas prices also contain a compelling mechanism: It's not that surprising to see gas prices rising like rockets once oil prices start to go up. But it might be surprising (or confusing) when gas prices fall like feathers once oil prices start to go down. This fast-rising slow-falling response (a.k.a, rockets and feathers) doesn't happen all the time. So why not take a look at the data yourself?
What's up with used cars?
The reopening of the economy and the shortage of new vehicles increased demand for used vehicles, which led to substantial inflation. Over the course of the pandemic, used car inflation was considered a major driving force of headline inflation. In January 2022, that trend reversed: Used car inflation has started to decline. And, as supply chains are returning to normal, new cars have become more readily available and the excess demand previously directed toward used cars has shifted back to new cars.
What's up with mortgage rates?
Mortgage rates have had their ups and downs during this period of high inflation. For example, at the start of 2022, these rates started rising and hit a recent peak of 5.81% on June 23; in early August, they came down to just under 5%. Here's some data and straightforward description of how inflation can affect your ability to pay off nominal debt, such as a mortgage. And here's a link to the average 30-year fixed rate mortgage data in FRED so you can track the data yourself.
Are inflation trends revealed by the Beige Book?
Before each FOMC meeting, the Federal Reserve releases the Beige Book, a summary of economic survey responses from across the county. This information is described as "anecdotal" and "qualitative," since it's collected from a wide range of contacts, including business and community leaders, who describe conditions as they see them. Given its subjective nature, though, does the Beige Book reflect actual trends? As it turns out, even simple automated text analysis can extract useful metrics from the Beige Book. And speaking of surveys, take a look at some of our graphs and explanation of what an inflation tendency survey measures.
Inflation lessons from 1974 and 1983
St. Louis Fed president Jim Bullard reviews the Fed's monetary policy during past periods of high inflation as a guide to informing the Fed's actions today.
Previous research and data on inflation
As the economy and prices recovered, the price increases in March and April 2021 were magnified because of the declines seen in March and April 2020. As noted above, inflation is measured as the percentage change in the price of a basket of goods from the prior year. So, by construction, the April 2021 inflation report was comparing current prices with depressed prices from April 2020, during the COVID-19 lockdown.
Inflation exceeds the Federal Open Market Committee's 2 percent inflation target. Check the St. Louis Fed's price pressures measure for more data.
Inflation rates have historically been more internationally synchronized than business cycle variables, such as output and employment, and this synchronization has broadened to include more types of goods and services. The globalization of supply chains, labor, and financial markets has helped link international price changes more tightly.