Inflation

Inflation, the rate of change of prices, is very unpopular because it erodes purchasing power. But very low inflation can be a sign of a weak economy and make monetary policy more difficult during downturns. Prior to the COVID pandemic, inflation in the United States consistently lagged below the 2 percent target of the Federal Reserve. This trend reversed dramatically as the economy recovered from the initial pandemic shock, with inflation reaching levels not seen in 40 years. Our posts explore the different causes of inflation and its economic costs; the difficulties associated with measuring inflation over time; the policy tools available to combat high inflation and their limitations; and insights into how inflation differs across sectors of the economy.