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The Latest CPI Inflation Numbers and their Significance
Inflation as measured by the CPI increased by 3% in June prior month. The CPI inflation increased by just 3.2 per cent in July after increasing by only three per cent year over year from last June to this June. And from July of last year to July of this year, that is an increase of 3.2% annually. Thus, the CPI inflation rate increased from 3 to 3.2 per cent month over month and from last July to this July, it increased by 3.2 per cent annually.
Concerns Regarding the Increase in CPI Inflation after 12 Months of Decline
This is a worrying element, therefore we need to consider it and be aware of it. After 12 consecutive months of declining CPI inflation, this uptick from 3 per cent to 3.2 per cent month over month is the first increase in month-over-month CPI inflation. In other words, the CPI increased from 3 to 3.2 per cent in July after declining for 12 consecutive months. That's quite important right there, so. That is the CPI inflation reading, by the way, guys. By assessing the prices of a specified basket of products, the CPI calculates inflation. However, the FED pays close attention to core PCE inflation. The two variables with the highest volatility are removed by the core PCE inflation, the items whose prices drastically fluctuate each month. These things are removed by the core PCE. Food and energy are those. In other words, the core PCE removes food and energy from its computation in a way similar to removing outliers, is that correct? The Federal Reserve views the core PCE as a better indicator of what the rate of inflation is in reality. Therefore, the core PCE is the actual metric that the FED is interested in.
Let me now describe how the most recent core PCE data appear. Similar to the CPI inflation, the core PCE inflation increased by 0.2 per cent month over month. Additionally, the core PCE increased by 4.7 per cent in July compared to July of last year. So, based on the core PCE inflation figures, prices have increased by 4.7 per cent since last year. The good news is that the core PCE for July, at 4.7 per cent, represents the lowest rate of inflation for the core PCE numbers since October 2021. Wonderful news, yes!
However, that's still too high when prices are growing at a 4.7 per cent rate, as they did from July of last year to July of this year. because a core PCE inflation rate of 2% is what the FED wants to see. They are after that. Therefore, the 4.7 per cent is still well behind the two per cent target that the FED has set for core PCE inflation. Remember that the Federal Reserve considers the core PCE inflation rate to be a more accurate indicator of inflation trends than the CPI that is typically reported on in the news.
The Fed's Strategies and Interest Rate Hikes to Combat Inflation
As you are all aware, the Federal Reserve has increased the federal funds rate 11 out of the last 12 times that they have convened during the past year and a few months. Everything is done with the express intent of reducing inflation so that prices don't rise as quickly. The FED recently increased interest rates by 25 basis points, or 1/4 of a percentage point. As a result, the federal funds rate, which refers to the interest rate that banks charge one another for overnight lending, now ranges between 5% and 5.50%. It represents the highest federal funds rate in the previous 21 years. Having said that, I think it's safe to say that the rate of inflation is declining too slowly overall. The FED may therefore be forced to hike interest rates going forward, maybe once or twice more this year. Perhaps, right? That is still up in the air. The next meeting of the FED is not until September. Additionally, they'll have a tonne of information to sort through when they next meet to decide whether or not to raise the federal funds rate.
You could be asking, "Well, why does the FED target a two per cent inflation rate?" According to the FED, they only want to see annual price increases of 2% for commodities. They also claim that they don't want greater costs to become the norm if they aim for anything higher than two per cent.
The Balancing Act between Inflation and Deflation
Some economists now assert, "Hey, we should be targeting a zero per cent inflation rate." However, if you do that, folks, there is a greater chance that deflation will occur. The complete opposite of inflation is now deflation. the rate at which prices are increasing. When prices start to fall too quickly and too soon, it is called deflation. And it's similar to what occurred during the Great Depression in the 1930s in this country, folks. Businesses are forced to let go of a large number of employees when prices start to fall too quickly and too soon. In a situation resembling deflation, unemployment skyrockets. Additionally, as unemployment soars, people's disposable income declines. And the economy kind of collapses on itself, correct? For both enterprises and people, tougher times have arrived. It is also the antithesis of inflation.
On the one hand, prices are going through the roof and inflation is quite high, correct? Inflation is that. Deflation, on the other hand, is the phenomenon where prices start to fall and level off. The FED says that two per cent inflation is exactly the level we want to be at so that we don't induce deflation and we have prices and inflation under control. The FED has to strike a balance between deflation and inflation, and they claim that 2% inflation is the optimum amount to aim for to prevent deflation and keep prices and inflation under control. Therefore, they sort of perform a balancing act and implement various measures to try to achieve that balance.
Reflection on the Fed's Efforts and the Impact on Inflation Numbers
The FED consistently makes mistakes with these programmes, which is the real kicker. As they say, hindsight is always 20/20. When you stand back and consider the big picture of inflation and where we've been over the past year and a half, there is a small bit of good news with these most recent inflation data, gentlemen. These CPI inflation rates were near 9% year over year in June. The CPI data for today are at 3.2%, which is significantly less than the inflation rate of 9% from the previous year that we were seeing. It does indicate, though, that the FED's actions have had some success. It simply isn't operating quickly enough, right? The core PCE numbers are still at 4.7 per cent, which is far higher than the two per cent they want to see to achieve balance. And it doesn't appear that it will fall to two per cent any time soon. But the decrease in the rate of inflation from where it was last summer kind of relieves the FED of some of the pressure and may be heard as a "Hey FED, slow down a little bit on increasing these interest rates and increasing this fed funds rate."
Positive Economic Growth Amidst Rising Inflation
After all of that, guys, the American economy is still expanding. GDP grew by 2 and 2.4 per cent in the first and second quarters of 2023, respectively. The Atlanta Federal Reserve is currently monitoring the third quarter of this year, and it appears that the GDP may have increased by up to 4%. That is progress.
Now that the economy is expanding, unemployment is still at its lowest level ever, hovering at 3.5, 3.7, or 3.8 per cent. Guys, since 1969 or 1970, or somewhere around that time, that is the lowest unemployment rate that has existed in the past 50 years. Therefore, although unemployment is extremely low and the economy is expanding, the FED is simultaneously boosting interest rates to 21-year highs, or between 5% and 5% for the federal funds rate. That never occurs now. The FED has successfully reduced inflation without increasing unemployment for the first time in American economic history, or at least in the past 70 years. When the federal funds rate is raised, unemployment typically soars because rising rates choke off consumer and corporate spending, forcing enterprises to fire employees. In general, unemployment rises as prices fall. But since that isn't the case, there is currently something unusual going on in America that hasn't truly been seen in a long time.
More experts are now expressing their belief that the United States may be able to avoid a serious recession despite the Federal Reserve's aggressive rate hikes and the inflation rate's unacceptably slow decline. What does this mean for us, then? This may temporarily allow many of us in the U.S., right here in America, to breathe a sigh of relief. But listen, I'm going to warn you guys in this video not to get too cosy. Recently, the U.S. credit rating has been reduced, and we are aware that the value of the dollar is still declining. And as we discussed in this Article, We are aware that at 4.7 per cent, the core PCE, a more comprehensive measure of inflation, is still somewhat high. In addition, housing costs and rent are still going up, which makes the situation even worse.
Recommendations for Individuals to Manage Their Finances in the Current Situation
Here, though, is what matters most to us. It implies that we must continue to be very deliberate with our money and ensure that we have an updated résumé because unemployment tends to increase when rates rise. We still want to establish that side business or side gig to earn some extra money, right? Finding ways to grow that revenue while continuing to be extremely frugal with our spending. ensuring that we are living within our means and maintaining a buffer between our income and spending so that we may use that space to save and invest. We want to be ready and prepared because we don't know when there may be a dramatic fall in the markets, including the labour market here in America. For the worst-case scenario, we must be ready. Continue to pay off your debt for depreciating, or losing value, items as well. Build up your emergency fund once more, folks, so you have a reserve you can use again just in case.
Additionally, keep trading stocks. Depending on what the FED decides to do with the FED funds rate at their next meeting in September, we might experience some stock market falls soon. However, you should continue to invest in the stock market via dollar cost averaging. Don't freak out, don't take all your money out and hide it under your bed, and don't pay all those fines and fees because you were afraid. When you saw breaking news on TV, you immediately wanted to withdraw all of your money. Not at all. Be pleased once more by the fact that core PCE inflation is lower than it was last year and that, although both statistics somewhat increased last month over month, they are lower than they were at this time last year. Most crucial, avoid becoming paralysed by fear. Keep using your money to perform the wonderful things you've been doing. But once more, try your best to be ready in case things start to become a little weird.
Conclusion
Guys, I just wanted to give you an inflation update in this Blog Post and inform you of the most recent inflation figures, what they mean for us, and what we should be doing and continuing to do right now. And I wanted to explain everything to you straightforwardly and understandably. Thank you for Reading my Article, always visit this blog for more updates like this.
