Inflation, Interest Rates and Why Women Need to Know About the Personal Consumption Expenditures (PCE) Price Index

Terri Spath |

Why have interest rates gone up so much and so quickly over the past year? We discuss what you need to know about interest rates, who controls them, and what is driving interest rates up.

What Exactly is Inflation?

Inflation means that the price of something, say an airline ticket, your grocery bill, how much it costs to fill your tank, or anything else, is more expensive today than it was in the past. There are many official economic measures of inflation that the U.S. government defines and reports on. A key metric you need to know is the Personal Consumption Expenditures (PCE) Price Index because it is a “favorite inflation” measure of the Federal Reserve,

The Federal Reserve (the “Fed) is a group of 7 people nominated by the President and approved by the Senate. The Fed meets regularly to discuss and set policy for two goals: keeping Americans employed (no set level) and inflation low (a target of 2%). To meet their goals, the Fed controls the supply of money in the U.S. and the overnight interest rate that banks charge each other.

The Relationship Between Inflation and Interest Rates.

When the economy experiences high inflation, your money is worth less over time. Recently, excessive inflation came about because of big spending by the U.S. government in reaction to the COVID-19 pandemic. To combat the inflation, the Fed Reserve has rapidly raised interest rates because higher rates can dampen consumer spending and business investment, and this in turn helps to cool down the economy and reduce inflation.

While the Fed looks at many pieces of economic data, it closely tracks the PCE price index as its favorite inflation measure. By following PCE, the Fed assesses whether inflation is under control or if more corrective measures are needed. By increasing interest rates, the Federal Reserve aims to slow down economic growth, dampen demand, and prevent an overheating economy that could lead to worse inflation.

What This Means for You.

In summary, the PCE price index is a crucial measure of inflation, and the Federal Reserve closely monitors it to make informed decisions regarding monetary policy. By increasing interest rates, the Federal Reserve is seeking to control inflation and maintain a stable economy. After the fastest rate hikes in history, the Fed should be close to the end of its efforts to control inflation. This means that interest rates may not be increasing by much more in the future.