Inflation Eased to 3% in June

EconEye Admin

3 years ago

Inflation cooled in June, boosting chances that the Fed will stop raising interest rates. Fed officials are focused on core inflation because they see it as a better predictor of future inflation than the headline inflation rate. The U.S. economy continues to defy predictions of an economic downturn.—wsj.com

Answer the following questions to check your understanding of the story.

How did the U.S. economy respond to rising interest rates in the past year?

Rising interest rates _____________.

a) decreased aggregate demand and slowed the rate at which the price level was rising

b) slowed aggregate demand growth and the rate at which the price level was rising

c) increased short-run aggregate supply and lowered the price level

d) decreased aggregate demand and lowered the price level

Wrong! - How did rising interest rates influence aggregate demand and short-run aggregate supply? Did the price level fall or rise at a slower rate?

That's Right! - Rising interest rates slow aggregate demand growth, and when aggregate demand growth slows the price level rises at a slower rate.

Why does the Fed believe that the core inflation rate is a “better predictor of future inflation” than the headline inflation rate?

Compared to the headline inflation rate, the core inflation rate _____________.

a) excludes food and fuel prices so it is less volatile

b) measures prices in the entire economy, not just consumer prices

c) never has a bias

d) includes food and fuel prices so it gives a complete picture of price changes

Wrong! - How is the core inflation rate calculated? Why would this calculation give a better picture of the underlying inflation rate than the headline inflation rate?

Well Done! - Food and fuel prices, which tend to be volatile are excluded from the measure of the core inflation rate. With this volatility removed, the Fed believes that using the core inflation rate is a better method of determining the underlying inflation rate.

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