Beat the Fed

By Chris Canipe, Katie Marriner, Stuart A. Thompson and Andrew Van Dam
Illustrated by Paul Antonson
Published Sept. 9, 2015 | Updated Dec. 1, 2016
Can you beat the Fed? This game lets you see how changes in prices of different goods and services—from restaurant meals to medical care—can influence the overall U.S. inflation rate.
Your goal in this game (and the Fed’s goal): get the U.S. inflation rate to 2%. While the Fed usually does this by adjusting interest rates, you’ll do it by guessing price changes in 12 broad categories of consumer spending.
Your PCE Inflation Path: Annual change in personal consumption expenditures price index
Your PCE Inflation Path
Annual change in personal consumption expenditures price index
2.6%
0%
0%
Tip:
Drag the charts to the left to affect this chart.

You've adjusted inflation, but you're not there yet. Keep going! You've reached 2% inflation. Submit your changes below if you're done.
By changing prices on housing and utilities, you've altered the overall inflation rate (above). Now keep increasing prices for the rest of the years — and the charts below — until you reach 2%.

What it could mean for real prices

ItemCost in Cost in 2016Difference
A pair of pants$49$59

All done with your changes?

All done with your changes?

See an analysis of your adjustments to the inflation rate and see how your changes could affect real prices.


 

You undershot! Inflation would be at %

Your inputs led to an inflation rate below the Fed’s 2% target, which is not surprising. Inflation’s so low right now that even the Fed is having trouble reaching that goal.

Economists caution that maintaining too low of an inflation rate increases the chances that inflation will go negative and turn into deflation, or falling prices. Deflation harms the economy because, among other things, it discourages everyone from spending: Why buy something today when its price will probably drop tomorrow?

Here is a stronger path for inflation: At their last meeting, Fed members projected the inflation rate will climb steadily in coming years and hit 2% in the long run.

You hit the Fed’s target with % inflation!

Under your scenario, we hit (or got very close to) the Fed’s long-run inflation target by the end of 2017. Fantastic! Most central bankers agree that an inflation rate of around 2.0% is ideal — high enough to avoid harmful deflation, but low enough to avoid volatility.

Now that you’ve conquered price inflation, something that continues to confound even the most senior Federal Reserve economists, maybe it’s time to look into a new career.

You overshot! Inflation would be at %

Your inputs have prices rising by % a year by the end of 2017! That’s above the range economists generally consider optimal. When it comes to inflation, predictability is king — people need to know what to expect in terms of tomorrow’s prices if they’re to make rational economic decisions. And right now, the global expectation is for central banks to keep inflation in the 2.0% range.

Here is a stronger path for inflation: At their last meeting, Fed members projected the inflation rate will climb slowly and steadily in coming years and hit 2% in the long run.

What your predictions mean for everyday prices

What does all this talk about inflation mean in the actual economy? It's tricky to apply PCE inflation to specific prices, but to give a sense of what your inflation predictions would mean, here are example prices for each sector:

ItemCost in 2015Cost in 2016Change based on
your inflation

What influences the economy most

You may have noticed your overall inflation rate changing a lot or very little depending on which category you were adjusting. The largest areas of spending — like housing, health care and financial services — have the largest effect on the inflation rate.

Percent of total spending by category

*Difference between the Fed’s long-run target and the upper bound of the 'central tendency' of committee members’ June 2015 estimates

Note: The detailed monthly breakdowns come from ‘underlying detail tables’ and are thus more likely to be based on judgmental trends or on less reliable source data. The Fed’s inflation projections are based on the 'central tendency' of its forecasts, a measure which excludes the three highest and three lowest estimates from Federal Open Market Committee members. Excludes a number of minor categories. For calculation purposes, inflation in those categories is assumed to continue at current rates.

Sources: Commerce Department (inflation); Federal Reserve (projections)