Inflation is a ubiquitous phenomenon that affects both the economy and our everyday lives. This is an indicator of the increase in the overall price level in the country and can have both positive and negative effects on our finances. In this article, we will discuss inflation in the United States – one of the largest economies in the world. You will learn what exactly inflation is and how it can be measured. We will also explain what the FED is, which has a huge influence on shaping monetary policy and controlling inflation.
What is inflation?
Inflation refers to the increase in the general price level of goods and services over a given period. This means that over time, the prices of most products and services in the American economy increase. It is an important economic indicator closely monitored by both businesses and consumers.
Inflation is commonly measured using two indicators. One is the Consumer Price Index (CPI) and the other is the Producer Price Index (PPI). They monitor changes in the prices of goods and services in the economy. These indicators provide valuable insight into the inflation rate, helping policymakers make informed decisions about monetary policy.
You’re probably wondering what the difference is between them? Below you will find an overview of them.
Difference between CPI and PPI
CPI and PPI are the main indicators that help measure and track changes related to inflation in the United States.
CPI, i.e. the consumer price index, is the most frequently used inflation indicator. It is prepared by the Bureau of Labor Statistics. It measures changes in the prices of goods and services purchased by households. We also call this index the “cost of living index.”
CPI measures differences in prices of a basket of goods and services. This basket includes a wide range of products, including: food, housing, transport, health care, education and entertainment. CPI is expressed as a percentage change over a specific period, such as month-to-month or year-to-year.
PPI, or the producer price index, is the second important indicator of American inflation. It is also produced by the Bureau of Labor Statistics and measures changes in commodity prices at the producer level. PPI includes the prices of raw materials, materials and other products used in the production process.
Moreover, PPI can serve as an early indicator of inflation, somewhat on a predictive basis. The idea is that price changes at the producer level may affect consumer prices in the future.
As you can see, the main difference is that on one side we have consumers (CPI) and on the other side we have producers and service providers (PPI). As we mentioned earlier, both indicators are regularly published by the Bureau of Labor Statistics. They provide an important source of information about rising overall price levels for goods and services in the United States. They are widely analyzed by economists, market analysts and policy makers. All this to monitor the level of inflation and take appropriate actions to manage it.
FED – what is it?
The Fed is the Federal Reserve System, sometimes also called the Federal Reserve. It is the central bank of the United States, the equivalent of the National Bank of Poland.
The Federal Reserve is responsible for U.S. monetary policy, ensuring the proper functioning of the entire banking system. The Fed is an independent government institution that operates under federal law.
The FED deals with, among others:
- maintaining a stable level of interest rates,
- preventing inflation,
- reducing unemployment,
- monitoring financial stability,
- conducting economic research and various types of analyses,
- regulating the amount of money in circulation.
The Fed is the key governing body of the American economy. It also plays an important role in shaping financial conditions and economic stability in the United States.
Inflation in the United States over the years
You can see the inflation rate in the United States over the years in the chart below. We chose the time period from 2015 to 2023. As you can see, the situation was at its worst in July 2022, when the inflation rate was 9.1%.
Click here to view the chart in detail. After going to the link, you will have to set the time period individually. There you can also check the current inflation situation in the US and other countries.
How much is inflation currently in the United States? Data from August 2023
The inflation level, i.e. the CPI index in the USA was 3.7% yoy in August, and in July it was 3.2% yoy. What does it mean? More or less, the annual CPI rate* in the United States increased for the second month in a row. Let us remind you that previously it had been falling for 12 months.
*Annual CPI dynamics means the percentage change in the CPI compared to the same month but in the previous year.
It is worth mentioning, however, that the August increase in inflation in the United States was not a surprise to anyone. In a way, only its scale was astonishing. It was assumed that the annual dynamics of the American CPI would increase to 3.6%. The main factors influencing this are more expensive fuels and continuing inflationary pressure in the services sector.
As for the monthly scale, the increase in the prices of the consumer goods basket was estimated at 0.6% month-on-month. It should be emphasized that here we have an example of the largest monthly increase since June 2022.
What contributed most to the increase in American inflation? First of all, rising fuel prices – the price of gasoline increased by as much as 10.6% per month, diesel by 9.1% per month. There was a 2% increase in prices (per month) related to transport services. Food prices and housing costs also increased. Compared to July this year Price increases were noticed in almost every category.
It is worth adding that what matters most for the prospects of monetary policy is core inflation. This is an indicator excluding fuel, energy and food. Core CPI amounted to 0.3% m/m in August. and 4.3% y/y. In this case, the monthly growth was higher than the market consensus (0.2% m/m) and was a big surprise. In terms of the annual dynamics of core inflation in the US, it was the lowest reading since September 2021.
Explanation of abbreviations:
mdm. – month to month,
rdr. – every year.
What influences the level of inflation?
The main causes of inflation in the United States include:
- increase in demand – when demand for specific goods and services exceeds supply, prices may increase,
- monetary policy – decisions made by the Fed regarding interest rates and credit availability may affect inflation. Lowering interest rates and easier access to credit may stimulate demand and contribute to an increase in inflation,
- increase in production costs – if production costs (wages, raw materials, energy or transport) increase, companies can pass these costs on to consumers in the form of higher prices. For example, an increase in oil prices may affect fuel and transport prices,
- external factors – events in the international arena, e.g. changes in commodity prices, exchange rates or international trade, may also affect inflation.
You should know that inflation is a complex and dynamic phenomenon that results from the interaction of many factors. The Federal Reserve (FED) and other institutions monitor these factors and take appropriate actions. Their goal is to control inflation and keep it at a level that supports economic stability.
The effects of inflation
The effects of inflation in the United States can have a significant impact on many areas of life. One of the most significant consequences is the decline in consumer purchasing power. The idea is that as prices rise, the amount of goods and services that can be purchased for a given amount of money decreases. This, in turn, could lead to a decline in overall consumer spending and slower economic growth.
Moreover, inflation also reduces the real value of savings and fixed-income assets. People who own fixed-income assets, such as bonds or annuities, may feel the negative effects of inflation. Price increases may make them unable to maintain the standard of living they are accustomed to.
When the prices of goods and services rise, the money in your account (and other assets) loses value. This means that the same financial resources can buy fewer goods and services than before. For example, if inflation is 3%, the cost of purchasing most goods and services may increase by this amount over the course of a year. This can lead to reduced purchasing power and loss of value in savings.
Inflation can also affect financial markets. Some investors may adjust their investment strategies to mitigate the effects of rising prices.
In this post, we discussed important issues regarding inflation in the United States. We explained the concept of inflation, its causes and effects. We also discussed the difference between CPI and PPI, which reflect price changes in the economy. We also presented the August inflation reading.
It is worth keeping in mind that the inflation situation in the USA also affects the Polish market to some extent. Therefore, it is advisable to monitor changes taking place in the United States.