Inflation: What It Is and How the Federal Reserve Tracks It
What is inflation?
Inflation is the increase in the prices of goods and services over time.
It's measured by the Consumer Price Index (CPI), which tracks the prices of a basket of goods and services purchased by consumers.
Inflation can be caused by a number of factors, including increased demand for goods and services, supply chain disruptions, and government spending.
How does the Federal Reserve evaluate changes in the rate of inflation?
The Federal Reserve (Fed) is responsible for maintaining price stability in the United States.
It does this by setting interest rates, which affect the cost of borrowing money.
When inflation is too high, the Fed raises interest rates to cool the economy and reduce demand.
When inflation is too low, the Fed lowers interest rates to stimulate the economy and increase demand.
The Fed's dual mandate
The Fed's dual mandate is to promote maximum employment and price stability.
Inflation is a major factor in achieving price stability.
The Fed aims to keep inflation at a low and stable level of 2%.
Inflation expectations
In addition to tracking current inflation, the Fed also monitors inflation expectations.
Inflation expectations are what people expect inflation to be in the future.
If inflation expectations rise, it can lead to higher actual inflation in the future.
### Recent trends in inflationInflation has been rising in recent months.
In May 2022, the CPI increased by 8.6% year-over-year, the highest level since 1981.
The Fed has been raising interest rates to combat inflation.
Conclusion
Inflation is a complex issue with a number of causes.
The Fed is responsible for maintaining price stability by setting interest rates.
The Fed's dual mandate is to promote maximum employment and price stability.
Inflation expectations are an important factor in the Fed's decision-making process.
Recent trends in inflation show that it has been rising in recent months.
The Fed is raising interest rates to combat inflation.
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