Consumer price inflation: how does it work?

INFLATION Current US consumer price index (CPI) measures the average change in prices for goods and services in the United States. It is calculated monthly, usually with inflation percentages calculated. The CPI data are processed by the US Bureau of Labor Statistics (BLS). The BLS processes CPI statistics on behalf of the Bureau of Economic Analysis (BEA).

WHAT’S GOING ON? Inflation: the current CPI is 2.5%. In the four quarters since the US Federal Reserve raised its benchmark federal funds rate from 1% to 1.75%, the CPI has risen by 3.3%. The increase was mainly due to higher prices for food, medical care and shelter. Read the latest CPI survey.

Experts say soaring prices are just an “unnatural cycle” resulting from a large increase in production since 2010. The spike in commodity prices and imports increased the real value of the dollar and its value on the international market. In 2011, the dollar peaked against emerging market currencies such as the South African rand and Russia’s rouble, creating an inflationary environment. Meanwhile, most Fed members have already said that the hike in interest rates from 2008 to 2015 was too slow. In turn, that has made life more expensive for US consumers, making them feel they are paying more for financial services, goods and services. To reduce that pressure, US policymakers were forced to lift interest rates to 2.5%.

But higher inflation does not seem to lead to high wage increases. Despite the increase in prices, the unemployment rate is at an 18-year low of 3.8%. According to wages advertised on US job sites, inflation means inflation rates have not budged since 2011. The average wage was reported to be $25.24 per hour in April, the most recent survey. And in 2016, American households spent 4.5% of their income, on average, on consumer goods, according to the latest government figures. Despite the increase in the CPI since 2009, wage increases are still comparatively low. Average weekly earnings in March increased by 2.7%, compared with 2.9% the previous month.

WHAT’S AHEAD? The expected direction of inflation is more likely to be a fall, rather than a rise. But economists are not sure how much longer the monetary policies set by the Fed and the country’s other central banks will prevent the consumer price index from hitting 3% and beyond. One of the reasons for the uncertainty is the impact of financial volatility, political developments and trade disputes. In February, the International Monetary Fund (IMF) forecast that inflation was set to rise to 3.1% this year, before staying around that level for four more years. The Fund said the US was not alone in experiencing rapid wage rises, but that outside the US, inflation was falling. “Many developing-country economies — not least emerging economies — are still under an inflationary pressure,” the IMF said. Many countries, such as Argentina, Venezuela and Vietnam, have had to introduce new and unpopular policies to bring down rising inflation.

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