Investments

U.S. inflation hits 6-year high

Annual growth hits Fed’s 2% target

After coming up short for more than half a decade, inflation in the U.S. is back on track. Indicators show inflation rose 2% in May, meeting the central bank’s target and marking the highest rate seen since April 2012.

The Federal Reserve believes a steady and predictable increase in inflation is an important sign of a healthy economy, and it asserts that 2% is an ideal rate of increase for strong, sustainable growth.

The rate of inflation was revealed by numbers released Friday by the U.S. Department of Commerce’s price index for personal-consumer expenditures excluding food and energy, which is the Fed’s preferred gauge.  

According to The Wall Street Journal, some attribute the 2% jump to growth in wages, thanks to a strong labor market and the strengthening effect of overall economic growth. The rise supports projections for two interest rate hikes yet to come in 2018.

In past years, as the WSJ article explained, economists have blamed the low inflation rate on a strong dollar, weak economic demand and a slow-to-recover labor market, which explains that a strong dollar cheapens the cost of imports and soft labor markets keep wages down. Other factors may also play a role, like the “Amazon effect” providing access to cheaper goods online, a more frugal aging population and cheap imports driven by globalization.

But, thanks to a drop in unemployment and a pick-up in demand, analysts say the economy grew 4% or more in the second quarter, nearly double the average rate of expansion.

While the 2% inflation target is encouraging, economists explained that rate will need to be sustained before there’s cause for celebration.

From the article: 

For the broader economy, hitting the 2% inflation target is “encouraging,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said in an interview. It means the economy is in better balance after slow growth in the wake of the severe 2007-2009 recession. However, “touching 2% isn’t grounds for victory” after the long run of low inflation, Mr. Feroli said. Fed officials “want to see it sustained.”

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