Inflation, the Federal Reserve System, and the Personal Consumption Expenditures Price Index

What is Inflation?

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.

When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.

A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time.

What is the Federal Reserve System?

The Federal Reserve System (the Fed) is the central bank of the United States. It was created in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system.

The Fed's primary responsibility is to conduct the nation's monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S.

The Fed's monetary policy decisions are made by the Federal Open Market Committee (FOMC), which consists of 12 members, including the seven members of the Board of Governors and five Federal Reserve Bank presidents.

What is the Personal Consumption Expenditures Price Index?

The Personal Consumption Expenditures (PCE) Price Index is a measure of inflation that tracks the prices of goods and services purchased by consumers.

The PCE Price Index is calculated by the Bureau of Economic Analysis (BEA) and is published monthly.

The PCE Price Index is one of the most closely watched measures of inflation by the Fed.

How Does the Federal Reserve System Affect Inflation?

The Fed can affect inflation through its monetary policy decisions.

When inflation is too high, the Fed can raise interest rates to slow down economic growth and reduce demand for goods and services.

When inflation is too low, the Fed can lower interest rates to stimulate economic growth and increase demand for goods and services.

How Does the Personal Consumption Expenditures Price Index Affect the Federal Reserve System?

The PCE Price Index is one of the key measures of inflation that the Fed uses to make monetary policy decisions.

If the PCE Price Index is rising too quickly, the Fed may raise interest rates to slow down economic growth and reduce inflation.

If the PCE Price Index is rising too slowly, the Fed may lower interest rates to stimulate economic growth and increase inflation.

Conclusion

Inflation, the Federal Reserve System, and the Personal Consumption Expenditures Price Index are all important factors in the U.S. economy.

The Fed uses its monetary policy decisions to affect inflation and the PCE Price Index is one of the key measures of inflation that the Fed uses to make these decisions.