Tracy Miller

The Consumer Price Index has been increasing at close to a 5 percent annual rate. The Federal Reserve just announced its plans to begin tapering its bond purchases — essentially scaling back an economic stimulus — later this month, but the market is not expecting it to fight inflation by raising interest rates until the middle of next year. Politics will have a role to play in that decision.

When the money supply increases faster than the production of goods and services, consumers use the extra dollars to bid up prices. The Fed has committed itself to flexible, average-inflation targeting, meaning it would like to keep inflation around 2 percent over the long run, but can tolerate higher or lower levels in the short run. However, the longer it delays raising interest rates, the harder it will be to hit the target.

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