US inflation rate by year: 2012 to 2023

In July 2023, the inflation rate in the United States stood at 3.18 percent. This figure increased to 3.67 percent in August; as of September 2023, the current US inflation rate stands at 3.70 percent.

The recent surge of violence in Israel might introduce an element of unpredictability into the Federal Reserve's efforts to combat inflation. It could lead to increased fuel prices while also exerting downward pressure on worldwide consumer confidence and economic expansion.

US inflation rate data: A decade in review

Over the past decade, the United States has experienced dynamic shifts in its inflation landscape. The country has navigated through periods of both subdued and heightened inflation, from the aftermath of the 2008 financial crisis to the difficulties posed by the COVID-19 pandemic and the Russian invasion of Ukraine.

The table below shows the US inflation rate data for the past decade with annual percentage change sourced from the World Bank. 

Business cycle and inflation in the US

The US inflation rate responds to the phases of the business cycle, which include expansion, peak, contraction, and trough.

In the expansion phase, the economy experiences robust growth characterised by low interest rates and increasing employment and wages. However, the peak marks the end of this growth period, accompanied by rising prices and inflation. To counter this, the Federal Reserve raises interest rates to control inflation in the US, initiating the contraction phase.

In the contraction phase, prices fall, growth slows, and employment drops. Prolonged contraction can lead to a recession and deflation. As the economy reaches the trough, prices hit their lowest point before the cycle restarts, with rising inflation.

The US economy is in the late stages of expansion, and a recession is increasingly likely in late 2023.

While indicators like the unemployment rate are holding steady, leading indicators in the housing, manufacturing, and credit sectors indicate a growth slowdown.

On a positive note, the consumer sector is being buoyed by approximately $1 trillion in savings that have accumulated since the pandemic, and there is a noticeable improvement in real wage growth. Inflation has notably slowed down, thanks to declining commodity prices and reduced pressures on manufacturing supplies.

However, persistent inflation categories, driven by tight labour markets, are keeping core inflation at levels higher than what has been observed in recent decades.

Fed policy response to inflation in the US

The Federal Reserve employs monetary policy to manage the US inflation rate as the economy cycles through expansion and contraction. The Federal Reserve closely monitors core inflation.

When core inflation significantly surpasses the Fed's two percent target, the Fed tightens monetary policy by raising the federal funds rate, impacting interest rates and increasing borrowing costs for consumers and businesses.

Conversely, to stimulate the economy and boost prices, the Fed lowers the discount rate, reducing borrowing costs for banks, consumers, and businesses.

Additional methods the Federal Reserve employs to boost the economy include:

• Purchasing government securities
• Reducing reserve requirements
• Executing open market operations

On November 1, the US Federal Reserve maintained the overnight interest rates at the existing range of 5.25-5.50 percent. The Federal Open Market Committee (FOMC) opted to keep rates unchanged at a 22-year high. This is because research shows capping inflation in the US strictly within 2 percent can hurt the economy.

Despite enduring high interest rates and persistent inflation above the Federal Reserve's two percent target level, the US economy has demonstrated resilience. According to the initial estimate from the US Bureau of Economic Analysis (BEA), the US gross domestic product (GDP) grew at an annualised rate of 4.9 percent in the third quarter.

How is inflation calculated?

Data on a selected basket of goods and services are regularly collected to calculate inflation, and their prices are compared to a base period. These price indices are then weighted to reflect the importance of each item in the average consumer's or producer's spending.

The resulting index is used to compute the inflation rate, which indicates the percentage price change over a specific time frame.

What is CPI?

The US CPI (Consumer Price Index) encompasses a range of consumer price indicators published monthly by the US Bureau of Labor Statistics (BLS). The CPI-U and the CPI-W are the most widely utilised among these measures. The CPI-U serves as the primary benchmark for monitoring consumer price inflation in the US, whereas social security benefit adjustments are linked to the CPI-W.

The US CPI tracks the monthly price fluctuations for some consumer goods and services. It encompasses eight primary categories:

1. Food and beverages
2. Housing
3. Apparel
4. Transportation
5. Medical care
6. Recreation
7. Education and communication
8. Other goods and services

The US CPI serves as the most commonly employed metric for gauging inflation, offering insights into the effectiveness of government fiscal and monetary strategies.

What is PPI?

The US PPI (Producer Price Index) monitors the average price changes domestic producers receive for their products and services over time. This index is a crucial metric for gauging inflation at the wholesale level and is composed of multiple indices that evaluate producer prices according to industry and product categories. The US BLS publishes the US PPI index every month.

The US PPI offers a perspective on inflation from the standpoint of industries and businesses, measuring price changes before consumers' final purchase of goods and services, i.e., the US CPI.