How to measure inflation?

In this article, see practical ways to measure inflation

It is very important to monitor inflation in our country, because through these numbers we can understand why the price of products can fluctuate. However, we know this exercise can be tricky.

In fact, knowing what changes or improves US inflation requires learning and time, but there are some factors that are easy to explain. In this article, understand a little more about the 2021 landscape and how it impacts our everyday lives and the employees of the companies. 

1. Accounts are different

With trillions of dollars being sent to American families and poured into the economy to bring liquidity and circumvent the effects of the economic crisis left by the coronavirus, the heating of inflationary pressure in the United States started to be noticed.

The Federal Reserve, the US central bank, pursues an average annualized rate of 2% per year. The Fed has repeated several times that it can accept inflation above this level “for some time”, as it considers the rise in prices as something only transitory for the country’s full recovery. The 2% has not yet been reached.

2. Monetary stimuli

For months, this reading that inflation could change the path of monetary stimulus has permeated the market. But the number that soured investors’ mood yesterday and caused the financial market to have a bitter day was the CPI (Consumer Price Index).

Economists had expected a 0.2% increase in April, but the index showed an increase of 0.8%. But this is not the only inflation data the market looks at, or even the most important. Other indicators also help to measure the temperature of prices — and all of them are heated.

For the Federal Reserve, the best parameter is the PCE price index for Personal Consumption Expenses, with the CPI being a kind of preview of what lies ahead. In March, the index rose 1.5% year-on-year and the new numbers should be known at the end of April.

Today we had new data, this time from the PPI (Producer Price Index). The result came well above expectations — 0.6% increase in April compared to March. But after yesterday’s reaction, the market left this information aside and preferred to engage in a sort of recovery.

3. It’s not just the stimuli

There is a lot of talk about injecting dollars into the economy, but a few other factors also help to explain the American dragon awakening. It was the necessary and primordial extra breath for economic activity, mainly measured by the PMIs, to recover.

But the productive sphere is not experiencing its best moment, which ends up impacting even more on price indicators. With the income of the American population not losing most of its purchasing power, demand remains persistent.

The coronavirus, however, forced changes. Several production parks were closed, productions were interrupted and deliveries were delayed. The units that have already resumed their operations still face another difficulty: the lack of input.

This leads to what we said in the previous item: the production process becomes more expensive and also reflects on the final price. Furthermore, reduced production meets unchanging demand, the old law of supply and demand, once again pushing the price up.

4. Accelerated inflation

As inflation accelerates, the labor market slips, and it is this dichotomy that ends up allowing the Federal Reserve to repeat that interest rates must remain low. In addition to the inflation target, the Fed also aims to achieve full employment for the American population.

If you remember, last week, the payroll — a report with data from the labor market — frustrated the market by creating just over 200 thousand new jobs when the expected one was a million. But, in general, the weekly requests for unemployment benefits continue to fall and so does the unemployment rate.

Rather than sour the mood, the negative number saved markets from succumbing to the brunt of fears of inflation. We know the effect didn’t last long, but do you know the reason for this to happen?

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