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What Is Inflation and How Does the Federal Reserve Evaluate Changes In the Rate of Inflation?

By    |   Sunday, 14 June 2015 02:23 PM

Inflation occurs when the overall price levels of many products and services increase over a period of time. The Federal Reserve evaluates several price indexes that measure the prices of specific goods and services.

The indexes focus on different areas, so they have varied calculations on the rate of inflation. The Fed attempts to reach conclusions on the overall picture of inflation from these inflation measures. Among the indexes examined by the Fed are the personal consumption expenditures, known as PCE, issued by the Department of Commerce. The Federal Reserve also looks at consumer price indexes and producer price indexes from the Department of Labor.

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Data from indexes may show short-term inflation movements for a particular month. The Fed watches these numbers to look at its long-term inflation goals. In recent years, the Fed has had a goal of keeping inflation in the 2-percent range, which is measured by annual changes in personal consumption expenditures.

The Fed may change monetary policy as a result of signals from the indexes. It also keeps the public informed of any movements to communicate its goals and reasons for any changes made with the hope that inflation stays in check over the long run, according to Advisor Perspectives.

Keeping inflation within a certain range avoids complex problems in the economy that occur from inflation. The Fed tries to avoid hyperinflation, in which inflation grows rapidly, or deflation when prices fall dramatically. High unemployment and economic stagnation can result in stagflation, which occurred during the rising inflation rates of the 1970s, according to Investopedia.

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The Fed examines various areas in the economy because there is no one cause for inflation.

Changes in economic indicators bring different results from month to month, so the Fed continually analyzes rates from the indexes to anticipate long-term changes in the inflation rate. Federal Reserve board members evaluate core inflation from such items as food and energy, which might jump significantly, but also look at the indexes of all goods and services to determine trends.

The Fed may make policy changes based on temporary or unique events that can alter inflation rates over the long term, according to the Board of Governors of the Federal Reserve System.

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Inflation occurs when the overall price levels of many products and services increase over a period of time. The Federal Reserve evaluates several price indexes that measure the prices of specific goods and services.
federal reserve, inflation
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2015-23-14
Sunday, 14 June 2015 02:23 PM
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