Putting Recent Inflation in Historical Context

report caused some consternation in financial markets. Headline inflation for April was 4.2 percent, which is a significant overshoot of the Federal Reserve’s (Fed’s) stated average inflation target of 2.0 percent. Although the Fed uses a personal consumption expenditures (PCE) inflation target, CPI inflation is highly correlated with that PCE target and is seen as a leading indicator of PCE inflation.1 Policymakers acknowledge that the April inflation report is likely picking up transitory effects, as April 2021 prices are compared with April 2020 prices; these were depressed during the height of the pandemic, especially for items such as restaurants, fuel, and hotels. However, the inflation report has stoked fears that the combination of recent fiscal stimulus and accommodative monetary policy has spurred higher prices.