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As consumers face significantly higher prices than a year ago, the Federal Reserve has maintained its position that high inflation, the increase in the price that consumers pay for goods and services, should not be expected. not last very long.

The Fed has changed its outlook and now plans to hike interest rates by the end of 2023, earlier than expected, noting the progress in economic activity and employment.

And while the 13-year peak in inflation, as measured by the annual change in the Consumer Price Index from the previous year, raised concerns, the central bank reaffirmed its belief that the price increase “largely reflected transient factors”.

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The Fed cuts its benchmark interest rate during an economic downturn to lower borrowing costs and stimulate activity. When the economy is booming, prices rise and the Fed tends to raise rates to keep inflation from climbing too above its 2% target. Its preferred indicator, the personal consumption expenditure price index, is usually just below the consumer price index.

A sudden explosion in consumer demand due to the reopening of the economy and an imbalance in supply disruptions are among the main factors driving up prices from the same period last year.

Adjustment for base effect

Another much-discussed consideration is the importance of the so-called base effect, which is the disproportionate impact when comparing the change from one year that was unusual to the next. This may be caused by an economic anomaly, like last year’s pandemic lockdown, when prices fell.

Change in the consumer price index compared to the previous year

Annual inflation

collapsed at first

pandemic, with

a drop of mars pulling

the rate below 2%.

March 2021 prices

were relatively high

to the 2020 crisis,

who helped to stimulate

inflation above 2%.

May 2021

5.0%

annual

inflation

Annual inflation

collapsed at first

pandemic, with

a drop of mars pulling

the rate below 2%.

March 2021 prices

were relatively high

to the 2020 crisis,

who helped to stimulate

inflation above 2%.

May 2021

5.0%

annual

inflation

Annual inflation

collapsed at first

pandemic, with

a drop of mars pulling

the rate below 2%.

March 2021 prices

were relatively high

to the 2020 crisis,

who helped to stimulate

inflation above 2%.

May 2021

5.0%

annual

inflation

Annual inflation

collapsed at first

pandemic, with

a drop of mars pulling

the rate below 2%.

May 2021

5.0%

annual

inflation

March 2021 prices

were relatively high

to the 2020 crisis,

who helped to stimulate

inflation above 2%.

Annual inflation

collapsed at first

pandemic, with

a drop of mars pulling

the rate below 2%.

March 2021 prices

were relatively high

to the 2020 crisis,

who helped to stimulate

inflation above 2%.

The base effect can be illustrated by calculating the price changes from two years ago, instead of one year ago, and annualizing these numbers. This adjustment puts inflation from pre-pandemic levels at 2.5%, instead of 5.0%, which is closer to the Fed’s 2% target rate.

Annualized change in the consumer price index

Compare prices at

pre-pandemic levels thwart

base effect and shows inflation

increasing more slowly than the year

the inflation rate indicates.

May 2021

5.0%

annual

inflation

2.5%

inflation of

pre-pandemic

level*

Compare prices at

pre-pandemic levels thwart

base effect and shows inflation

increasing more slowly than the year

the inflation rate indicates.

May 2021

5.0%

annual

inflation

2.5%

inflation of

pre-pandemic

level*

Compare prices at

pre-pandemic levels thwart

base effect and shows inflation

increasing more slowly than the year

the inflation rate indicates.

May 2021

5.0%

annual

inflation

2.5%

inflation of

pre-pandemic

level*

Compare prices at

pre-pandemic levels

thwarts the base

effect and shows inflation

increases more slowly than the

annual inflation

rate indicates.

May 2021

5.0%

annual

inflation

2.5%

inflation

befor-

pandemic

level*

Inflation from pre-pandemic level *

Compare prices at

pre-pandemic levels

thwarts the base

effect and shows inflation

increases more slowly than the

annual inflation

rate indicates.

Recovery time

Some sectors that illustrated the base effect experienced high annual inflation in May, but prices were actually below their pre-pandemic levels.

For example, accommodation away from home, which includes prices for hotels and motels, fell in early 2020 when travel restrictions were put in place. As restrictions eased this year, prices have skyrocketed. They were 9% higher in May than a year earlier when the pandemic started. These prices, however, are still lower than pre-pandemic levels.

Inflation from pre-pandemic level *

* Change from two years earlier, annualized

Inflation from pre-pandemic level *

* Change from two years earlier, annualized

Inflation from pre-pandemic level *

* Change from two years earlier, annualized

Air fares also suffered from the base effect. Tariffs rose 24.1% in May from the previous year, but were down 6% from their pre-pandemic level.

Reverse base effect

The base effect impacted inflation for groceries in the other direction. As people turned to eating at home at the start of the pandemic, prices have risen. Annual inflation peaked at 5.6% in June 2020 and fell to 0.7% in May from the previous year, when prices were relatively high. Compared to pre-pandemic levels, however, prices never rose more than 3.3% and rose 2.7% in May.

Inflation from pre-pandemic level *

* Change from two years earlier, annualized

Inflation from pre-pandemic level *

* Change from two years earlier, annualized

Inflation from pre-pandemic level *

* Change from two years earlier, annualized

Tight supply

The prices of some goods and services have increased according to both measures of inflation in recent months. In some industries, supply chain issues abound as demand increases and businesses struggle to keep pace.

The recent global chip shortage has had a ripple effect across all industries and in particular has strained new car inventories, causing buyers to buy in the used car and truck market instead. Demand and tight supply helped push up used vehicle prices 29.7% from the previous year. The increase from pre-pandemic levels was high at 13.7%, but less marked than the comparison a year earlier.

Inflation from pre-pandemic level *

* Change from two years earlier, annualized

Inflation from pre-pandemic level *

* Change from two years earlier, annualized

Inflation from pre-pandemic level *

* Change from two years earlier, annualized

Car rental companies cut their fleets early in the pandemic, leaving them with fewer used vehicles to rent to customers later in the year. Car and truck rental prices more than doubled in May from the previous year and rose 30.2% from pre-pandemic levels.

How does the United States rank

As more people return to work and the economy fully reopens, the Fed will continue to monitor consumer prices. Inflation in the United States has been higher than in the rest of the Group of Seven, the world’s largest advanced economies, partly reflecting the impact of a strong fiscal stimulus on the US economy.

Consumer prices in G-7 countries, change from previous year

Sources: Department of Labor (US inflation); Organization for Economic Co-operation and Development (G-7)

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