The most recent U.S. inflation numbers are out and they reveal that prices are rising. Inflation in the US is outpacing most of the world by nearly 3 percentage points according to the Federal Reserve Bank of San Francisco. That may explain why the US has outpaced the world’s average rate of inflation in the past decade. Oscar Jorda (the bank’s senior policy advisor) warns against taking too much faith in these numbers. However, the overall picture is clear.
Different factors determine the rate of inflation. The CPI is the price index used by the government to determine inflation. The Labor Department calculates it by surveying households. It is a measure of the amount spent on goods or services however it does not include non-direct expenditure which makes the CPI less stable. Inflation data should be viewed in relation to other data and not as a stand-alone figure.
The Consumer Price Index, which tracks changes in the prices of products and services is the most frequently used inflation rate in the United States. The index is updated each month and shows how prices have risen. The index is a helpful tool for planning and budgeting. Consumers are likely to be concerned about the cost of goods and services. However it is crucial to understand the reasons why prices are rising.
Production costs rise which, in turn, increases prices. This is often referred to as cost-push inflation. It’s caused by the rising of costs for raw materials, such as petroleum products and precious metals. It can also impact agricultural products. It is important to remember that when the cost of a commodity increases, it also affects the price of the item being discussed.
Inflation figures are usually difficult to find, however there is a method that will aid in calculating the amount it costs to buy items and services over the course of a year. The real rate of return (CRR), is a better estimation of the nominal annual cost of investment. With that in mind, the next time you are planning to purchase stocks or bonds make sure to use the actual inflation rate of the commodity.
At present the Consumer Price Index is 8.3% above its year-earlier level. This was the highest annual rate since April 1986. Inflation will continue to increase because rents make up a large part of the CPI basket. Inflation is also triggered by the rising cost of housing and mortgage rates, which make it more difficult to buy an apartment. This increases the demand for housing rental. Furthermore, the potential for railroad workers affecting the US railway system could lead to disruptions in the transport of goods.
From its close to zero-target rate, the Fed’s short term interest rate has risen this year to 2.25 percent. According to the central bank, inflation is expected to rise by only a half percent in the coming year. It’s not clear whether this increase will be enough to stop the rise in inflation.
The rate of inflation that is the core that excludes volatile oil and food prices, is approximately 2 percent. Core inflation is usually reported in a year-over year basis and is what the Federal Reserve means when it says its inflation target is 2%. The core rate has been in the lower range of its target for a long period of time. However it has recently begun to increase to a point that is threatening a number of businesses.