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August 6, 2022 Reading Time: 2 minutes

Far from moderating, new data from the Bureau of Economic Analysis show that inflation picked up in June. The Personal Consumption Expenditures Price Index (PCEPI), which is the Federal Reserve’s preferred measure of inflation, grew at a continuously compounding annual rate of 6.5 percent from June 2021 to June 2022, up from 6.1 percent in the prior month. Prices have grown at a continuously compounding annual rate of 4.3 percent since the start of the pandemic, which is significantly higher than the Fed’s stated goal of 2 percent. Prices in June were 6.1 percentage points higher than they would have been had the Fed hit its target over the period.

Core PCEPI inflation, which excludes food and energy prices and is thought to be a better indicator of future PCEPI inflation, also picked up. Core PCEPI grew at a continuously compounding annual rate of 4.7 percent over the last year, up from 4.5 percent in May. It has grown 3.5 percent per year since January 2020. In June, core PCEPI was 3.9 percentage points higher than the 2-percent growth path projected from January 2020.

Figure 1. Personal Consumption Expenditures Price Index, January 2020 – June 2022

The Federal Reserve has consistently underestimated the extent of the inflation problem. The median Federal Open Market Committee member’s projection of inflation has increased every quarter since June 2020. In June, the median FOMC member projected 5.2 percent inflation for the year, 90 basis points higher than the rate projected in March. Since prices are already outpacing the revised projection, FOMC members will likely revise up their projections again when they meet in September.

Table 1. Median FOMC member projections of inflation

Projection Date2021202220232024Longer run
June 20201.61.72.0
September 20201.71.82.02.0
December 20201.81.92.02.0
March 20212.42.02.12.0
June 20213.42.12.22.0
September 20214.22.22.22.12.0
December 20215.32.62.32.12.0
March 20224.32.72.32.0
June 20225.22.62.22.0

After failing to check demand-driven inflation for several months, the Fed has finally changed course. The FOMC raised its federal funds rate target by 50 basis points in May and 75 basis points in both June and July. Fed Chair Jerome Powell has said the FOMC is committed to bringing inflation back down to 2 percent.

The change in policy can be seen in bond markets, which have reduced the amount of inflation priced into Treasuries. In March, expected PCEPI inflation peaked at roughly 3.4 percent per year over the five-year horizon and 2.8 percent over the ten-year horizon. Now, they are around 2.5 and 2.3 percent, respectively. Although expected inflation still exceeds the Fed’s 2-percent target for the near term, it is much lower than it was just a few months ago and appears to remain anchored near 2 percent over the longer term.

Inflation has been too high for too long. Bringing inflation back down should be the Federal Reserve’s top priority.

William J. Luther

William J. Luther

William J. Luther is the Director of AIER’s Sound Money Project and an Associate Professor of Economics at Florida Atlantic University. His research focuses primarily on questions of currency acceptance. He has published articles in leading scholarly journals, including Journal of Economic Behavior & Organization, Economic Inquiry, Journal of Institutional Economics, Public Choice, and Quarterly Review of Economics and Finance. His popular writings have appeared in The Economist, Forbes, and U.S. News & World Report. His work has been featured by major media outlets, including NPR, Wall Street Journal, The Guardian, TIME Magazine, National Review, Fox Nation, and VICE News. Luther earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Capital University. He was an AIER Summer Fellowship Program participant in 2010 and 2011.  

Selected Publications

Cash, Crime, and Cryptocurrencies.” Co-authored with Joshua R. Hendrickson. The Quarterly Review of Economics and Finance (Forthcoming). “Central Bank Independence and the Federal Reserve’s New Operating Regime.” Co-authored with Jerry L. Jordan. Quarterly Review of Economics and Finance (May 2022). “The Federal Reserve’s Response to the COVID-19 Contraction: An Initial Appraisal.” Co-authored with Nicolas Cachanosky, Bryan Cutsinger, Thomas L. Hogan, and Alexander W. Salter. Southern Economic Journal (March 2021). “Is Bitcoin Money? And What That Means.”Co-authored with Peter K. Hazlett. Quarterly Review of Economics and Finance (August 2020). “Is Bitcoin a Decentralized Payment Mechanism?” Co-authored with Sean Stein Smith. Journal of Institutional Economics (March 2020). “Endogenous Matching and Money with Random Consumption Preferences.” Co-authored with Thomas L. Hogan. B.E. Journal of Theoretical Economics (June 2019). “Adaptation and Central Banking.” Co-authored with Alexander W. Salter. Public Choice (January 2019). “Getting Off the Ground: The Case of Bitcoin.Journal of Institutional Economics (2019). “Banning Bitcoin.” Co-authored with Joshua R. Hendrickson. Journal of Economic Behavior & Organization (2017). “Bitcoin and the Bailout.” Co-authored with Alexander W. Salter. Quarterly Review of Economics and Finance (2017). “The Political Economy of Bitcoin.” Co-authored with Joshua R. Hendrickson and Thomas L. Hogan. Economic Inquiry (2016). “Cryptocurrencies, Network Effects, and Switching Costs.Contemporary Economic Policy (2016). “Positively Valued Fiat Money after the Sovereign Disappears: The Case of Somalia.” Co-authored with Lawrence H. White. Review of Behavioral Economics (2016). “The Monetary Mechanism of Stateless Somalia.Public Choice (2015).  

Books by William J. Luther

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