Tracking inflation these days provides insights in two different areas. First, of course, are the changes in the cost of every day living. And second, inflation news has an indirect but powerful influence on the future of interest rates. If inflation goes up or stubbornly remains above the Federal Reserve Board’s 2% target, then it’s logical to expect the Fed to raise rates as a way to bring it down. If inflation is trending down in some meaningful way, then we might expect the Fed to hold off and monitor the trend.
The inflation data also factors into how some economists view our near-term economic future. Whenever the Fed raises rates, its goal is to slow down the economy and pull some liquidity out of the business world, which pushes us all a step closer to a slowdown. The dance between cooling the economy and crashing it is delicate and precise.
So what are we seeing now? The Consumer Price Index for All Urban Consumers—which includes food and energy prices—rose 0.1% in March after a 0.4% gain in February. Multiply the average by 12 and you get roughly a 3% annual inflation rate.
So what are the tea leaves telling us? The current rate is still higher than the Fed target, but things are cooling down relative to last year. With that in mind economists are expecting the Fed to raise rates, but not dramatically, in its next rate hike window with the intention that this will lead the economy toward more stable prices across the economy.
This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice.