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What Is Inflation and How It Affect Your Finances & Investments?

Inflation affects daily life—moderate levels support growth, while high inflation diminishes purchasing power. Understand its causes, effects, and management. What Is Inflation and How Is It Measured? Inflation refers to the rise in the general price level, which leads to a decrease in the purchasing power of money. It usually occurs over time, meaning that you can no longer buy as many goods or services as you could before with the same amount of money. Inflation is typically measured using several key indicators, each with its calculation method and scope. These indicators help governments, central banks, and economists formulate and adjust economic policies. They also guide businesses in forecasting future cost changes and market price trends. For consumers, inflation indicators reflect the extent of price increases in daily life, affecting purchasing power, savings returns, and investment choices. 3 Key Inflation Indicators: CPI, PPI, PCE Consumer Price Index (CPI)CPI measures changes in the prices of everyday goods and services consumers regularly purchase, such as food, housing, transportation, and healthcare.However, Core CPI, often called core inflation, excludes highly volatile items—typically food and energy. This helps policymakers avoid overreacting to short-term price fluctuations and provides a clearer view of long-term inflation trends.Application Scope: Government policies, wage adjustments, consumer purchasing power analysisRelease Schedule: The U.S. Bureau of Labor Statistics releases the previous month's data between the 10th and 15th of each month. View US CPI Producer Price Index (PPI)The PPI measures price changes at the production stage, focusing primarily on the prices of goods in industries such as manufacturing, agriculture, and mining. It can provide an early indication of rising costs for goods.Additionally, changes in the PPI often precede changes in the CPI, as businesses tend to pass on increased costs to consumers.Application Scope: Business cost forecasting, supply chain management, commodity price trendsRelease Schedule: The U.S. Bureau of Labor Statistics releases the previous month's data between the 10th and 15th of each month, usually one day before or after the CPI release. View US PPI Personal Consumption Expenditures Price Index (PCE)The PCE measures price changes for all consumer goods and services, including harder-to-measure items like healthcare and education. The PCE’s weighting adjusts dynamically based on changing consumption patterns, making it a more accurate reflection of actual changes in living costs compared to the CPI.The core PCE excludes volatile items such as food and energy, and it is the Federal Reserve’s (Fed) preferred core inflation indicator as it more accurately reflects underlying price pressures in the economy.Application Scope: Fed monetary policy, long-term inflation trend analysisRelease Schedule: The U.S. Bureau of Economic Analysis releases the previous month's data on the last Friday of each month. View US PCE Other Inflation Indicators In developing countries like India and the Philippines, the Wholesale Price Index (WPI) is an important inflation indicator, reflecting price fluctuations from the production stage to the wholesale market, particularly for raw materials and commodities. Additionally, the GDP deflator is also used to measure price changes across the entire economy, covering price fluctuations in all economic activities, including consumption, investment, and government spending. It has a broader scope than the CPI and PPI, making it more suitable for overall economic analysis. ▌Learn more: How is the GDP deflator calculated? Causes and Impacts of Inflation Inflation typically arises from an increase in the money supply, rising demand, or supply chain bottlenecks. These factors may act independently or simultaneously, affecting the economy and causing prices to rise. When inflation occurs, it can have various effects, such as reducing the purchasing power of money, raising business production costs, and even influencing investment markets and consumer behavior. Moderate inflation can support economic growth, but if inflation becomes too high or uncontrolled, it may threaten financial stability. 5 Common Types of Inflation Demand-Pull Inflation When the economy is booming, or the government increases spending or cuts interest rates to stimulate consumption, demand for goods and services becomes overheated. When total demand exceeds total supply, businesses raise prices to address the shortage. Cost-Push Inflation Supply chain disruptions, rising tariffs, or wage growth can lead to higher production costs, forcing businesses to raise prices, which drives inflation. Monetary Inflation When there is too much money in circulation and economic growth cannot keep pace, the value of money decreases, leading to widespread price increases. Simply put, when there's too much money, things get more expensive. Structural Inflation Internal structural problems within the economy, such as low industry efficiency, supply chain bottlenecks, or market monopolies, lead to an imbalance between supply and demand, causing long-term price increases. This type of inflation is complex and long-term, requiring targeted reforms by the government and cannot be solved by short-term monetary policy. Asset Inflation When large amounts of money flow into asset markets such as stocks and real estate, it drives up asset prices, indirectly influencing overall inflation. For example, in a low-interest-rate environment, investors rush into the housing market, pushing home prices up. This makes housing costs a source of inflationary pressure and exacerbates wealth inequality. Recently, U.S. President Donald Trump’s proposed tariff policies, such as imposing tariffs on steel and aluminum, are expected to directly raise the cost of raw materials for U.S. manufacturing. Tariffs on products like chips, cars, and semiconductors will also increase the manufacturing costs of tech products, potentially driving up their prices. These additional costs may be passed on to consumers, triggering cost-push inflation. Severity of Inflation Inflation can be categorized based on its severity, each reflecting different underlying causes and impacts on the economy. Mild inflation can encourage spending and investment, while galloping inflation might signal economic instability. Hyperinflation, however, can lead to a collapse of consumer confidence and require drastic economic reforms to control. Inflation Type Severity Description Inflation Rate Hyperinflation Most Severe Typically caused by fiscal crises, excessive money printing, or political instability, leading to soaring prices, currency collapse, and economic turmoil. Monthly inflation rate rate exceeds 50% Galloping Inflation Moderate Severity Often driven by surging demand, supply shortages, or government policy, resulting in rapid price hikes. Annual inflation rate of 7-20% or higher Mild Inflation Mild A healthy economic phenomenon with minimal impact, as prices rise gradually. Central banks usually target 2% inflation Inflation Expectations Can Fuel Inflation Inflation expectations refer to the anticipation among businesses, consumers, and workers that prices will rise, leading to behaviors that further accelerate inflation. For example, businesses may raise prices in advance, affecting retail sales data, while workers may demand higher wages, both of which contribute to driving prices up. For example, some U.S. manufacturers anticipated higher import costs due to President Donald Trump’s tariffs on steel and aluminum. As a result, several businesses preemptively raised prices to offset expected increases. (Reference: US factories likely to feel the pain from Trump’s steel and aluminum tariffs) Inflation’s Impact on the Economy, Businesses, and Consumers Moderate inflation stimulates consumption and investment, often reflecting healthy economic growth. However, excessive inflation reduces purchasing power, increases uncertainty, and may hinder economic expansion. For businesses, inflation raises production costs and compresses profit margins. During periods of high inflation, businesses may increase prices and wages to cope with rising costs, often passing these expenses on to consumers, which drives up the cost of living. As consumers face higher living expenses, they may reduce spending, which can hurt business sales. Meanwhile, demands for wage increases to offset inflation could further raise operating costs, creating a challenging cycle for both businesses and consumers. This resembles the inflationary pressure caused by trade policies introduced after U.S. President Donald Trump took office, which heightened market concerns over employment and supply chain issues, further dampening consumer spending and hindering retailers’ operations. ▌Learn More: Trump Expands Tariff Scope: Autos and Semiconductors in Focus amid Global Supply Chain Uncertainties How Consumers and Businesses Can Combat Inflation In times of inflation, both consumers and businesses must adopt strategies to build financial resilience and enhance competitiveness—key to weathering inflationary pressures How Can Consumers Fight Inflation? Reevaluate Budget Priorities: Focus on essential spending and cut back on discretionary expenses. Invest in Inflation-Hedging Assets: Consider real estate or gold to protect against inflation. Allocate Funds to Stocks or Treasury Inflation-Protected Securities (TIPS): Mitigate the impact of currency depreciation. Enhance Skills and Income Potential: Increase earning capacity to keep wages aligned with inflation. How Can Businesses Combat Inflation? Regularly Review and Adjust Pricing Strategies: Protect profit margins from erosion. Optimize Supply Chain Management: Explore alternative materials and suppliers, and consider stockpiling key resources. Leverage Automation and Digitization: Boost productivity and reduce reliance on inflation-sensitive resources. Invest in Inflation-Resilient Assets: Allocate capital to real estate or commodities to safeguard value. Phillips Curve: The Relationship Between Unemployment and Inflation The Phillips Curve, introduced by New Zealand economist A.W. Phillips in 1958, illustrates the inverse relationship between unemployment and inflation. By analyzing historical data in the UK, Phillips observed that when unemployment is low, inflation tends to be higher, and when unemployment is high, inflation usually declines. (The X-axis represents the unemployment rate, and the Y-axis represents the wage inflation rate, with an inverse trade-off between the two. Source: Federal Reserve Bank of St.Louis) Elaborately, during periods of economic expansion and low unemployment, companies raise wages to attract workers, which increases production costs and drives up prices. Conversely, when the economy slows down and unemployment rises, wage growth slows, reducing inflationary pressure. Mechanism of the Phillips Curve Relationship: Increased Demand → Business Expansion → Lower Unemployment → Wage Increases → Higher Production Costs → Rising Prices (Inflation) Decreased Demand → Business Contraction → Higher Unemployment → Wage Declines → Lower Production Costs → Reduced Price Pressure (Lower Inflation) (From 1978 to 1980, the U.S. Experienced High Inflation and Low Unemployment. Source: DataTrack) ▌Related Indicators United States: CPI (YoY) United States: Unemployment Rate Pros and Cons of Inflation Moderate inflation can inject vitality into the economy and promote overall healthy economic development. However, inflation acts like an invisible tax, unequally redistributing wealth and posing challenges to long-term economic stability and social harmony. Pros Cons Stimulates consumption and investment Reduces debt burden Increases asset resale value Decreases purchasing power of money Expands the wealth gap Reduces savings value Pros of Inflation Moderate inflation has a positive impact on the economy, driving consumption and investment. As people expect prices to rise in the future, they tend to make purchases or investments in advance to avoid higher costs, such as for cars, appliances, or real estate. Inflation helps reduce the debt burden, especially for borrowers with fixed-rate loans. As the value of money gradually decreases, the real burden of debt lightens, benefiting individuals with mortgages, businesses seeking financing, and even government debt. Additionally, in an inflationary environment, the resale value of assets typically increases. For example, real estate usually appreciates with rising prices, creating wealth-building opportunities for asset holders and encouraging more capital investment in the market. Cons of Inflation The most direct effect of inflation is the continued decline in purchasing power, meaning that the same amount of money can buy fewer goods and services, increasing the real cost of living for consumers. More concerning is that inflation tends to exacerbate wealth inequality. The wealthier classes typically hold more tangible assets, such as real estate, stocks, and art, which increase in value during inflation, thus safeguarding or even growing their wealth. Lower-income households, on the other hand, are less likely to benefit from asset appreciation and are more vulnerable to price increases, which widens the wealth gap. Inflation also erodes the value of savings. When the inflation rate exceeds interest rates on deposits, the real value of bank savings shrinks year by year, making plans for retirement, education, or homeownership more difficult. Historical Hyperinflation Crises Hyperinflation is typically triggered by excessive money printing, misguided economic policies, wars, or recessions. Governments, in an attempt to cover spending or fill budget deficits, print excessive amounts of money, leading to an oversupply of currency and rising prices. International sanctions and trade restrictions can also exacerbate the situation, driving prices even higher, eventually resulting in currency collapse and loss of public confidence in the money. Here are several notable hyperinflation cases that illustrate how these factors have led to severe economic crises in different countries. Weimar Republic: Excessive Money Printing Led to Collapse (1921-1924) After World War I, Germany faced massive war reparations and the pressure of economic reconstruction, prompting the government to begin printing large amounts of money. By the peak in 1923, prices were doubling almost every hour. People used wheelbarrows filled with cash to buy basic items, and the price of a cup of coffee could increase before you even finished drinking it. In some cases, people even used banknotes as fuel. Eventually, USD 1 equaled 4.2 trillion Marks. This economic disaster wiped out the savings of the middle class and created the conditions for Hitler's rise to power. (In 1923, during Germany's hyperinflation, children played with worthless coins. Source: Flickr / dalecourtarts) Zimbabwe: Policy Mistakes + Supply Chain Collapse (2000s) Due to the Zimbabwean government's forcible land seizures, agricultural production declined, and excessive printing of money to cover government expenditures led to an oversupply of currency. Additionally, international sanctions restricted trade and foreign investment, worsening the economic situation. This ultimately resulted in extreme inflation in 2008, causing the currency to completely collapse. The government continuously issued higher denomination banknotes, even printing bills with values as high as 100 trillion. People had to carry bags of cash to buy basic goods, and many stores adjusted prices every hour. By 2009, the government was forced to abandon its currency and switch to using the U.S. dollar, South African rand, and other foreign currencies for circulation. (Zimbabwe's government issued banknotes with denominations as high as 100 trillion Zimbabwean dollars. Source: Flickr / CashInfo.org) Venezuela: Oil Dependence & Policy Failures (2010s to Present) Venezuela was once the wealthiest oil-producing country in South America, heavily reliant on oil export revenues. However, after the decline in oil prices in the early 2010s, government revenue significantly decreased. Coupled with improper economic policies, this led to an expanding fiscal deficit and a sharp deterioration in inflation. Since 2016, inflation has worsened, people's savings have evaporated, and basic goods have become scarce, triggering a massive wave of migration. In 2017, the U.S. increased sanctions on its oil and financial sectors, worsening the economy. It wasn't until 2023 that the sanctions on Venezuela's oil were relaxed, allowing the country to resume oil exports. However, high inflation continues to make life difficult for the population, with the economic recovery remaining slow and the future filled with uncertainty. (Venezuelan citizens risk their lives traveling to Colombia in search of help. Source: Flickr / prmpress) Inflation vs. Deflation vs. Stagflation For policymakers, moderate inflation is typically the preferred choice. Deflation is seen as more difficult to manage, while stagflation is the most challenging economic dilemma, often requiring structural reforms rather than simply monetary policy to resolve. Comparison Item Inflation Deflation Stagflation Definition Prices rise, money loses value Prices fall, money gains value Prices rise and economy stagnates Causes Too much money, higher demand, rising costs Lack of demand Supply shocks, policy errors Impact Promotes growth, but excessive inflation can lead to hyperinflation Suppresses investment and consumption, potentially leading to recession Hard to manage, requires balancing both Risks Wealth depreciation, lower buying power Economic stagnation, rising unemployment Rising prices and unemployment together Unemployment Rate Low High High Policy Response Tighten money supply Ease money supply Tackle both inflation and stagnation Examples Common Japan's "lost three decades" 1970s Oil Crisis View Japan Core CPI Inflation is a key economic phenomenon that affects everything from national policies to everyday life. Moderate inflation can drive economic growth by stimulating consumption and investment. However, when inflation spirals out of control, it leads to declining purchasing power, rising business operating costs, and increased financial stress for households. Understanding the causes and impacts of inflation, as well as adjusting financial strategies accordingly, is essential for the long-term stability of individuals, businesses, and the broader economy. Track Key Inflation Indicators ▶ Read More How to Calculate CPI and Inflation Rate? 5 Key Formulas US Inflation Barometer: Why Inflation Expectations Matter?

Trump Expands Tariff Scope: Autos and Semiconductors in Focus amid Global Supply Chain Uncertainties

The global trade war continues to intensify as U.S. President Donald Trump implements aggressive tariff policies. While the 25% tariffs on goods from Canada and Mexico have been postponed until early April, the additional 20% tariff hike on Chinese goods has already taken effect. Previously, Trump also signaled plans to impose high tariffs on automobiles, semiconductors, and pharmaceuticals. This series of actions is widely interpreted as an attempt to address the U.S. trade deficit and incentivize manufacturing reshoring to the United States. On March 4, Taiwanese semiconductor giant TSMC, in coordination with the White House, announced an additional $100 billion investment to build manufacturing facilities in the U.S., a move seen as a strategic response to avoid potential high tariffs. In light of these developments, the following analysis examines the potential impact of tariffs on key U.S. trade deficit partners, including China, Canada, and Mexico, as well as the implications for the automotive and semiconductor industries. In recent years, the U.S. trade deficit has repeatedly reached record highs. The goods trade deficit alone has surged from $791.1 billion a decade ago to $1.2 trillion in 2024, underscoring the nation’s growing dependence on foreign goods following decades of manufacturing offshoring. Notably, automobiles, semiconductors, and pharmaceuticals—set to be subjected to tariffs in April—rank among the top five contributors to the U.S. trade deficit in recent years. (Source: ITC, TrendForce) On the other hand, according to WTO data, the simple average Most Favored Nation (MFN) tariff rate in the U.S. stands at approximately 3.3%, significantly higher than that of most major trade deficit countries. It is evident that Trump aims to leverage tariff policies to address the severe trade deficit, rectify what he perceives as unfair trade practices, and reduce the overconcentration of production for strategically important goods in specific regions. At the same time, these policies are intended to incentivize the reshoring of both domestic and foreign manufacturers to boost employment within the U.S. (Source: ITC, WTO, TrendForce) The U.S.-Canada-Mexico Automotive Supply Chain Faces Collective Pressure The deeply integrated automotive supply chain between the U.S., Canada, and Mexico is expected to bear the brunt of these tariff measures. According to the International Trade Center (ITC), U.S. auto-related imports amounted to approximately $391.46 billion in 2024, maintaining its position as the world's largest importer. Among its key trade partners, Mexico ranks as the top source, accounting for roughly 35% of total imports. The automotive sector plays a crucial role in Mexico's economy, contributing approximately 7.3% of its GDP. Similarly, Canada, the fourth-largest source of U.S. auto imports, accounts for around 13% of the total, with the industry representing about 2.7% of its GDP. Under the United States-Mexico-Canada Agreement (USMCA), Mexico and Canada have formed a highly integrated automotive supply chain with the U.S., leveraging geographical proximity and competitive production costs. More than ten major global automakers have chosen Mexico as a key manufacturing base, where over 30 vehicle assembly plants operate alongside hundreds of component suppliers. The frequent cross-border movement of parts and components underscores the industry's heavy reliance on seamless trade. If tariffs are officially imposed, the cascading effect of multiple duties applied throughout the production and assembly process could significantly inflate overall vehicle costs, ultimately dampening U.S. consumer demand for imported new cars. (Source: ITC, TrendForce) This move could not only harm the export and economic momentum of Mexico and Canada but also expose the U.S. to risks of rising prices, weakened demand, and job losses in related industries. According to TrendForce, if the U.S. imposes a 25% tariff on imports from Mexico and Canada, soaring vehicle prices may lead consumers to delay car replacements or shift toward leasing and the used car market. As a result, U.S. auto sales in 2025 are projected to decline by 3% year-over-year, reversing the previously expected 1% growth. Although Trump has postponed the imposition of a 25% tariff on certain imports from Canada and Mexico until early April, the Peterson Institute for International Economics forecasts that if the new U.S. tariff rates takes effect and both countries implement full-scale retaliatory measures, U.S. real GDP growth would decline by 0.5 percentage points compared to the baseline scenario. However, the impact on Canada and Mexico would be significantly more severe, with GDP growth contracting by 2.3 and 3.4 percentage points, respectively. (Source: PIIE, TrendForce) Meanwhile, research from Yale University’s Budget Lab indicates that under full retaliation, U.S. vehicle prices are projected to rise by 6.1%, while overall consumer prices in the U.S. would increase by 1.2%. This move may be intended to accelerate negotiations for relocating North American auto manufacturing to U.S. soil, while simultaneously addressing concerns over fentanyl inflows and illegal immigration. (Source: The Budget Lab at Yale, TrendForce) Potential Impact of High Auto Tariffs on Other Countries For Japan, South Korea, and Germany, automobiles remain a cornerstone of their exports, with the U.S. being their largest single export market. While these three nations have globally diversified automotive supply chains, and their auto exports as a percentage of GDP in 2023 stood at approximately 1.2% for Japan, 2.3% for South Korea, and 0.8% for Germany, the potential expansion of high U.S. auto tariffs to a global scale would still exert significant pressure on their automotive industries, labor markets, and broader economies. Taking Germany as an example, the country has faced mounting challenges since the outbreak of the Russia-Ukraine war, losing access to cheap Russian energy while also phasing out nuclear power domestically. Additionally, stringent EU mandates to transition toward electric vehicles and competition from China—where automakers benefit from lower labor costs and advanced technology—have increasingly eroded the competitiveness of German automakers in both technology and pricing. According to ITC global export data, while Germany has remained the world's leading auto exporter, its share of global automotive exports has declined from 18.3% a decade ago to 15.6% in 2024, largely due to the rapid ascent of China's auto industry. Meanwhile, Handelsblatt has reported that the market share of German-brand vehicles has slipped from 22% before the pandemic in 2019 to 20.4% in 2024, amid intensifying competition from China’s BYD, South Korea’s Hyundai, and the U.S.’s Tesla. If U.S. auto tariffs are fully implemented, the competitiveness of German exports in the American market could deteriorate even further. However, tariff rates alone are not the sole determinant of new vehicle sales. The final terms of the tariffs, their implementation timeline, the pace of interest rate cuts, inflation trends, and automakers’ strategic responses will all play a crucial role in shaping future sales projections. Taiwan’s Semiconductor Supply Chain Response In the semiconductor sector, the rapid expansion of artificial intelligence (AI) has driven soaring global demand for high-end chips in recent years. According to ITC data, the U.S. imported approximately $485.8 billion worth of electronic machinery and equipment in 2024, ranking as the second-largest import category. Among these, semiconductor products related to advanced chips accounted for roughly $9 billion, with Taiwan leading the market by supplying around 28% of these imports, thanks to its dominance in advanced semiconductor manufacturing. (Source: ITC, TrendForce) TrendForce data indicates that Taiwan is projected to hold a 71% share of the global advanced semiconductor manufacturing market by 2025, with major global IC design firms relying heavily on Taiwan’s advanced fabrication technologies, particularly those provided by TSMC. The critical role of Taiwan in global semiconductor production is further underscored by a 2023 report from the U.S. International Trade Commission, which noted that 44.2% of the logic chips used in the U.S. originate from Taiwan, along with 24.4% of memory chips. This strategic importance has made Taiwan a direct target of former President Trump’s tariff proposals, including a previously floated idea of imposing a 100% tariff on Taiwanese semiconductors. However, such a move is widely regarded as more of a negotiating tactic than a viable policy measure. ITC data shows that while semiconductors account for approximately 47% of Taiwan’s total exports, only 4.7% of these semiconductor products are directly shipped to the U.S., representing just 2.2% of Taiwan’s total exports. The primary reason is that the vast majority of chips imported by the U.S. arrive embedded in finished electronic products rather than as standalone semiconductor components. Consequently, identifying and selectively imposing tariffs on Taiwanese-made chips would be both logistically challenging and economically costly. (Source: ITC, TrendForce) The proposed 100% tariff on Taiwanese semiconductors is largely intended as a negotiation tactic aimed at compelling TSMC and other key manufacturers to expand chip production within the U.S., particularly for advanced process node chips. This move is designed to ensure that the U.S. maintains domestic capabilities in cutting-edge semiconductor manufacturing. In response, TSMC announced on March 4 that it will increase its investment in the U.S. semiconductor sector, committing an additional $100 billion to bring its total investment to $165 billion. This expanded investment will fund the construction of three additional advanced manufacturing sites, as well as two high-performance computing (HPC) advanced packaging facilities and an R&D center. According to TrendForce analysis, if the expansion proceeds smoothly, the new fabs are expected to begin mass production by 2030 at the earliest, with TSMC’s U.S. capacity share rising to 6% by 2035. However, the company’s production capacity in Taiwan is projected to remain at or above 80%. While expanding U.S. production capacity could mitigate risks associated with excessive manufacturing concentration, the associated cost pressures may be passed on to American IC design customers. This could lead to increased component and end-product prices, ultimately dampening consumer purchasing power. According to the latest TrendForce report, “Updates and Impacts Related to Effects of Trump Administration’s Tariffs on Canada, Mexico, China, and Taiwan” any severe disruption in Taiwan’s semiconductor supply would cause logic chip prices in the U.S. to surge by as much as 59%, triggering a cascading cost increase across various electronic products, including smartphones, laptops, and servers. South Korean Semiconductor Giants Caught Between Intensifying Pressures South Korea is a dominant force in the global memory chip industry, with Samsung and SK Hynix accounting for approximately 60% of the global DRAM and NAND Flash markets in terms of revenue. Many consumer electronics rely on memory chips from these two Korean giants. According to ITC data, memory-related exports accounted for around 10% of South Korea’s total exports in 2024 and contributed approximately 4% to the country's GDP. Previously, geopolitical considerations and incentives from the Biden administration’s CHIPS Act encouraged Samsung to pledge a $44 billion investment to build two advanced semiconductor fabs and an R&D facility in the U.S. However, due to mounting financial pressures, the company later reduced its investment to $37 billion and ultimately secured $4.745 billion in subsidies from the U.S. government—26% lower than the amount initially outlined in the memorandum of understanding. SK Hynix, on the other hand, had announced a $3.87 billion investment to establish an advanced packaging plant in Indiana, scheduled for mass production by 2028, with approximately $450 million in subsidies. With TSMC’s latest announcement of an additional $100 billion investment in the U.S., Samsung and SK Hynix may now face increased pressure to ramp up their own commitments. This could also serve as leverage for the Trump administration to push South Korean firms into expanding their U.S. investments. At the same time, the imposition of high semiconductor tariffs could disrupt the existing production strategies of Korean memory manufacturers. Both Samsung and SK Hynix have concentrated their memory production in South Korea and China. For instance, Samsung manufactures 35% of its NAND Flash chips at its Xi’an facility in China. However, the company is also facing increasing competition from Chinese rivals such as Yangtze Memory Technologies (YMTC). Reports from South Korean media suggest that Samsung is planning to produce 286-layer stacked NAND Flash chips at its Xi’an facility to counter YMTC, which has already begun mass production of 260-layer stacked NAND Flash. Under the Biden administration, Samsung was granted permission to manufacture NAND Flash chips with more than 200 layers in China. However, with Chinese semiconductor firms rapidly advancing and Trump seeking to accelerate foreign semiconductor investment in the U.S., Samsung and SK Hynix could face growing operational pressure. They may be forced to either increase production of higher-layer NAND Flash and advanced-process chips in the U.S. or shift more of their manufacturing capacity away from China. Overall, it is evident that Trump’s frequent introduction of various tariff measures is not solely aimed at increasing tax revenues. Instead, his strategy is primarily focused on reducing significant trade deficits with specific countries and incentivizing both foreign and domestic manufacturers to shift production back to the United States. By doing so, the administration seeks to enhance the competitiveness of U.S. industries and create more domestic employment opportunities. However, should the U.S. impose high tariffs, countries such as China, Canada, and Mexico may retaliate with countermeasures, leading to a cycle of escalating trade tensions. Additionally, the cost increases associated with supply chain relocations would not only impact the targeted industries and nations but could also slow down U.S. economic growth, weaken job creation, and drive inflation higher. Beyond these immediate concerns, multinational corporations facing tariff negotiations and supply chain restructuring pressures may adopt a more cautious approach toward future investments and capacity allocation. This heightened uncertainty could further accelerate a global realignment of trade flows and industrial supply chains, reshaping international economic and trade dynamics. Read more at Datatrack ▶ Read More Updates and Impacts Related to Effects of Trump Administration’s Tariffs on Canada, Mexico, China, and Taiwan U.S. to Hold Over 20% of Advanced Semiconductor Capacity by 2030, TSMC Expands Investment to US$165 Billion, Says TrendForce Global New Car Market to Grow 2.4% in 2025; US Faces Tariff Uncertainty, China’s Smart Car Competition Intensifies, Says TrendForce

Manufacturing PMI Recap: US, China, EU, Japan & Korea (Latest)

In February, the U.S. manufacturing sector remained in expansion for the second consecutive month, but new order demand weakened further due to potential tariff policies. Meanwhile, the eurozone saw its contraction ease as political stability improved in Germany and France, with business sentiment reaching its highest level since the onset of the Russia-Ukraine war. In Asia, China's PMI rebounded to expansion following the end of the Lunar New Year holiday, recovering from the brief contraction last month, though domestic demand growth remained sluggish. In Japan, manufacturing contracted for the eighth consecutive month, with business confidence declining to its lowest level since mid-2020 due to the slow domestic recovery and concerns over U.S. tariffs. Meanwhile, South Korea’s PMI remained stable, with weak domestic demand counterbalanced by improving external demand, though business confidence remained subdued amid domestic economic uncertainty. United States PMI: Expansion for Two Consecutive Months, But Tariff Concerns Emerge The U.S. manufacturing PMI stood at 50.3 (previous: 50.9) in February, marking its second consecutive month in expansion. Among the sub-indices, new orders ended their five-month uptrend, plunging into contraction territory at 48.6 (previous: 55.1), recording the sharpest decline since April 2020. Meanwhile, the production index declined slightly but remained in expansion at 50.7 (previous: 52.5). The inventories index further fell to 45.9 (previous: 48.4), while supplier delivery times lengthened to 54.5 (previous: 50.9). At the same time, the employment index retreated into contraction at 47.6 (previous: 50.3). Additionally, the prices index surged to 62.4 (previous: 54.9), marking the largest increase since January 2024 and the highest level since June 2022. Overall, concerns over potential tariff impacts have led businesses to adopt a more cautious stance, resulting in a slowdown in both new orders and hiring. Meanwhile, companies have been stockpiling, negotiating cost absorption with clients, and raising material prices to mitigate potential tariff costs, leading to higher inventory levels and longer delivery times. Read more at Datatrack Euro Area PMI: Contraction Eases, Business Sentiment at Highest Since Russia-Ukraine War The Eurozone's Markit PMI came in at 46.6 (prior: 45.1) in February, remaining in contraction but hitting a two-year high. New orders saw the smallest decline since May 2022, production remained stable, and backlogs continued to decline at a slower pace, indicating a mild recovery in demand. However, employment remained weak, with businesses accelerating layoffs at the fastest pace in four and a half years. Input prices continued to rise, reaching a six-month high, yet due to weak demand, firms opted to absorb costs, resulting in slightly lower output prices compared to the previous month. At the national level, Germany and France remained the most severely affected but showed signs of improvement as domestic political uncertainties eased: Germany: The February Markit PMI rose to 46.5 (previous: 45.0), the highest since January 2023. While export orders continued to decline, the pace of contraction eased, resulting in the smallest drop in new orders since early 2022. Production contraction also slowed, reaching its lowest decline since May 2023.However, employment contraction accelerated, marking the largest drop in three months. Following Germany’s cabinet reshuffle on February 23, businesses remained cautious about tariffs and political tensions but remained optimistic about the future, with production expectations staying near a three-year high. France: The February Markit PMI improved to 45.8 (previous: 45.0), a nine-month high. New orders continued to decline due to weak domestic and external demand, but the contraction was the smallest in eight months. Production continued to decline but at a slower pace, and inventories decreased amid weak demand and reduced purchasing.Employment remained in contraction, but the rate of job cuts was the slowest in three months. Backlogs remained stable as new orders and employment declines eased. Notably, business confidence turned optimistic for the first time in seven months, although concerns persisted in the automotive and construction sectors. Italy: The February Markit PMI rose to 47.4 (previous: 46.3), a five-month high. Domestic demand remained weak, causing new orders to continue declining, in line with the 12-month average. Production also slowed, but the pace of decline has moderated over the past three months.Employment fell further, with layoffs accelerating to a three-month high, while backlogs continued to decline. However, businesses were optimistic that Germany’s political situation would stabilize post-election, and anticipated further rate cuts from the ECB, contributing to a relatively positive sentiment. Read more at Datatrack   China PMI: Three-Month Expansion Ends, Urgency for Policy Stimulus Increases China manufacturing PMI stood at 50.2 (previous: 49.1) in February, returning to expansion after a brief contraction last month. Production (52.5, previous: 49.8) and new orders (51.1, previous: 49.2) both returned to expansion, while inventories declined further to 47.0 (previous: 47.7) and employment slightly improved to 48.6 (previous: 48.1). However, exports rose to 48.6 (previous: 46.4), and the new orders minus customer inventory indicator (2.8, previous: 2.7) did not improve significantly. As such, the PMI recovery likely reflects a post-holiday rebound as businesses resumed operations and cleared accumulated orders from January, rather than a significant improvement in domestic demand. Read more at Datatrack Japan PMI: Seventh Consecutive Month of Contraction, Business Sentiment at a Two-Year Low Japan manufacturing PMI stood at 49.0 (previous: 48.7) in February, marking its eighth consecutive month of contraction. New orders and production continued to decline, though at a slower pace. Surveyed firms reported further declines in finished goods inventories, with the largest drop in a year, as weak demand persisted. Hiring stagnated due to rising labor costs and weak demand, while backlogs continued to decrease. Input costs rose further compared to the previous month and remained above the long-term average, with firms raising output prices despite sluggish demand. Business confidence for the next 12 months remained positive but fell to its lowest level since June 2020, reflecting concerns over the slow domestic recovery and U.S. protectionist policies. Read more at Datatrack South Korea PMI: External Demand Recovery Drives Expansion, Domestic Recovery Uncertain South Korea manufacturing PMI stood at 49.9 (previous: 50.3) in February. New orders rose for the second month, driven by new product launches and growing overseas demand. Export orders expanded for the fourth consecutive month, though growth was limited by weakening demand in the U.S. and Europe, offsetting gains in Asian markets. However, weak domestic demand led to a sharp drop in business confidence, causing employment to contract at the fastest pace since July 2022. Rising raw material costs further intensified input inflation, prompting businesses to raise output prices, marking the sharpest price increase in 15 months. Taiwan PMI: Returns to Expansion on Strong AI Chip Demand, Outlook Remains Optimistic Taiwan’s manufacturing PMI rebounded to 54.0 (previous: 48.7) in February , returning to expansion. New orders recovered to 54.4 (previous: 49.7) after a brief contraction last month, while the production index surged to 59.9 (previous: 45.0), reflecting multiple factors: China's “replacement and upgrade” policy driving a recovery in consumer electronics, U.S. firms accelerating production before tariff implementation, and robust demand for CoWoS advanced packaging and high-end AI chips. At the same time, the electronics and optics industry led to an increase in inventories, reaching 52.7 (previous: 46.5), marking the first expansion since September 2022. The new orders minus customer inventory index also climbed to 10.1 (previous: 4.4), while the employment index rose further to 52.0 (previous: 50.8), indicating that demand remained strong even after the Lunar New Year holiday. Notably, despite the Trump administration’s series of tariff announcements, Taiwan’s six-month outlook index continued to rise to 54.3 (previous: 51.7), suggesting that most industries remain optimistic. However, the transportation sector saw a significant decline to 37.5 (previous: 50.0), reflecting the impact of tariffs on the automotive industry as well as weaker-than-expected sales, which weighed on business confidence. Global Manufacturing PMI Summary While the U.S. and China manufacturing sectors expanded in February, the U.S. saw new orders and hiring slow due to tariff concerns, and China's recovery was largely driven by post-holiday factors rather than strong domestic demand. The eurozone remained in contraction, but stabilizing political conditions in Germany and France helped ease the downturn. Meanwhile, Japan and South Korea faced persistent domestic demand weakness, rising input costs, and deteriorating business confidence. With the Trump administration implementing tariffs on China, Canada, and Mexico, and potentially expanding measures to other industries and countries, global manufacturing will likely remain under the cloud of trade policy uncertainty in the near future.

How to Calculate CPI and Inflation Rate? 5 Key Formulas

Consumer Price Index (CPI) tracks inflation. Knowing how it's calculated helps analyze trends, set strategies, and make informed decisions. How to Calculate CPI? 2 Key Steps As consumers, professionals, and decision-makers, understanding how government agencies calculate the Consumer Price Index (CPI) is essential for accurately interpreting the data. Step 1: Understanding CPI Data In the U.S., the Bureau of Labor Statistics compiles CPI data by collecting extensive price information on household goods and services, which are then categorized. Since different categories affect household spending differently, weights are assigned to determine their impact on CPI calculations. These prices and weights form the "CPI basket," which includes essential expenses like food, transportation, and housing. (Source: Latest CPI weight data from BLS） Additionally, CPI designates a specific year as the "base year," setting its index at 100 to serve as a reference for comparing price changes in the "current period." By comparing current prices to base-year prices, CPI reflects the extent of price fluctuations. View U.S. CPI Step 2: Understanding How to Calculate CPI Government agencies use the categories in the CPI basket to calculate a weighted average, which compares the price changes between the base year and the current period. The formula is as follows: \[CPI = \frac{{\text{Current Period Total of Goods/Services Prices}}}{{\text{Base Period Total of Goods/Services Prices}}} \times 100\] Example: Assume 2020 is the base year, with a total price of goods/services in the base period at $100; and 2024 is the current period, with a total price of goods/services at $135. Using the CPI formula: CPI = ( $135 / $100 ) × 100 = 135 ➤ This means that, compared to 2020, the price level in 2024 has increased by approximately 35%. How to Use CPI to Analyze Price Changes The Consumer Price Index (CPI) is crucial for consumers, businesses, and governments. It tracks overall price changes and provides insights into the price trends of various categories of goods and services. For example, if food prices rise while transportation costs remain stable, the categorized CPI data helps governments or businesses respond effectively, such as by adjusting wage policies or modifying product pricing strategies. One key indicator is the Annual Average CPI, which helps smooth out short-term price fluctuations and shows a more stable long-term price trend. This is important for analyzing overall price movements over a year. The calculation is as follows: \[ \text{Annual Average CPI} = \frac{\text{Total of Monthly CPI Values for the Year}}{12}\] How to Calculate Inflation Rate Using CPI and Formulas The inflation rate measures how fast the overall price level rises, which is essential for consumers to understand changes in purchasing power. For businesses and governments, inflation impacts their strategies and decisions. Here are two formulas for calculating inflation using the CPI, used to measure both short-term and long-term price changes: CPI YoY: Reflecting Short-Term Inflation Impact The CPI Year-on-Year (commonly denoted as CPI YoY) compares the price changes between the current period and the same period from the previous year, reflecting the extent of price increases. The inflation rate is usually referring to the CPI YoY. The formula is as follows: \[ \text{CPI YoY} = \frac{\text{Current Month CPI} - \text{Same Month CPI in Previous Year}}{\text{Same Month CPI in Previous Year}} \times 100\% \] Example: The U.S. CPI YoY in January 2025 January 2025 CPI: 319.09 January 2024 CPI: 309.69 Calculated using the formula: (319.09 − 309.69) / 306.69 × 100% ≈ 3.04% ➤ This means that the inflation rate for January 2025 is 3.04% higher than in January 2024. View U.S. CPI (YoY) The CPI YoY reflects short-term price changes, but since CPI includes all categories, it can be influenced by short-term factors, leading to significant fluctuations. To get a clearer picture of long-term price trends, analysts often look at the “Core CPI YoY”, which excludes volatile items like food and energy, providing a more stable view of price changes. View U.S. Core CPI (YoY) ▌Related Indicators: United States: CPI (SA) United States: Core CPI (SA) Annual Average CPI YoY: Reflecting Long-Term Inflation Trends The Annual Average CPI YoY provides a clearer view of long-term inflation trends compared to the regular CPI YoY, as it smooths out short-term fluctuations in monthly data and offers a more stable inflation assessment. Formula: \[ \text{Annual Average CPI YoY} = \left( \frac{\text{Annual Average CPI for the Current Year}}{\text{Annual Average CPI for the Previous Year}} - 1 \right) \times 100\% \] Example: The U.S. Annual Average CPI in 2024 2024 U.S. Annual Average CPI: 313.69 2023 U.S. Annual Average CPI: 304.69 Calculated using the formula: [( 313.69 ÷ 304.69 ) - 1] × 100% ≈2.95% ➤ This means that the price level in 2024 has increased by 2.95% compared to 2023. If the Annual Average CPI YoY keeps rising (e.g., from 2% → 3% → 4% over 3 years), it indicates growing inflationary pressure, suggesting that prices may continue to rise in the future. Conversely, if the rate slows down or declines, it may signal easing inflation or even potential deflation risks. ▌Related Indicators: United States: CPI (SA) GDP and Inflation Rate: How to Calculate Using GDP Deflator GDP can also be used to calculate the inflation rate. This is done by measuring the difference between Nominal GDP and Real GDP, often referred to as the GDP Deflator. \[ \text{GDP Deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100 \] Calculate the inflation rate using the GDP deflator: \[ \text{Inflation Rate} = \left( \frac{\text{Current Period GDP Deflator} - \text{Previous Period GDP Deflator}}{\text{Previous Period GDP Deflator}} \right) \times 100\% \] Key Concepts: Nominal GDP: Measured using current prices in the economy, without adjusting for inflation. Real GDP: Adjusted for inflation using the prices from a selected base year. CPI vs GDP Deflator: Differences in Inflation Calculation Coverage CPI focuses only on the prices of goods and services that consumers purchase.GDP Deflator includes all goods and services in the economy, not just consumer goods but also investment goods, government spending, and exports. Target Group CPI reflects the cost of living for consumers. GDP Deflator reflects price changes for the entire economy. Conclusion, Use CPI if you are concerned with consumer cost of living. Use GDP Deflator if you are analyzing overall economic price changes. How Consumers Can Use CPI Consumers can leverage the Consumer Price Index (CPI) to track price changes, understand which goods and services are increasing or stabilizing in price, and adjust their spending and budgeting accordingly. Here are some practical applications: Adjust Daily Spending Budget or Strategy Refer to “Overall CPI, Core CPI, Category-specific CPI” to fine-tune daily expenses. When prices rise, consumers can look for discounts, promotions, and cut unnecessary expenses to manage their budget. Salary Determination Refer to the “Annual Average CPI YoY, Core CPI YoY”, and Real Wage Growth to assess whether salary adjustments are necessary. If CPI continues to rise, workers should discuss wage increases with employers to maintain purchasing power. Adjust Savings Plan Refer to “Annual Average CPI YoY, Core CPI YoY” and Inflation Expectations to adjust savings. As CPI rises, indicating growing inflation pressure, Increasing savings to preserve the future quality of life. Make Investment Decisions Long-term investments: Refer to “Annual Average CPI YoY, Core CPI YoY” to evaluate the impact of inflation on the investment portfolio. Rising CPI suggests a need to consider inflation-hedging assets. Short-term investments: Refer to “CPI MoM, Core CPI MoM, CPI Market Forecasts” to gauge market reactions to immediate price pressures, allowing for adjustments to short-term investment strategies. ▌Related Indicators: United States: CPI (SA) (This indicator calculates the annual average CPI YoY) United States: Core CPI (SA) United States: CPI (MoM) United States: Core CPI (YoY, SA) How Businesses Can Respond to CPI Changes Businesses need to monitor changes in the Consumer Price Index (CPI) when setting prices, controlling costs, and planning long-term strategies. Here are several common responses: Adjust Pricing Strategy Refer to "Annual Average CPI YoY, Core CPI YoY" to predict necessary price adjustments. If CPI rises steadily, businesses may need to adjust product or service prices to maintain profit margins. Consider using "CPI MoM" for short-term price fluctuations for quick reactions. Adjust Salaries and HR Policies Refer to "Annual Average CPI YoY, Core CPI YoY." When CPI increases, employees face higher living costs. Businesses should consider salary adjustments to ensure employee satisfaction and productivity while avoiding talent loss due to inflation. Control Production Costs Refer to "Core CPI YoY, Category-specific CPI" to track trends in key input costs. If raw material prices rise, businesses may consider early procurement, adjusting supply chains, or seeking alternatives. For rising energy or transportation costs, optimizing logistics or improving production efficiency could help reduce profit erosion. In case of rapid cost increases, consider using "Producer Price Index (PPI)" to anticipate supply chain cost changes. Adjust Investment and Capital Allocation Long-term Strategy: If CPI growth increases, central banks may raise interest rates, leading to higher borrowing costs. Prepare by adjusting financing strategies based on "Annual Average CPI YoY." Short-term Strategy: For immediate trends, use "CPI MoM" to adjust capital allocation, such as accelerating or delaying capital expenditures. In investment decisions, consider "Market Interest Rates" and "Benchmark Rates," as CPI is a lagging indicator and cannot fully predict future rate changes. ▌Related Indicators: United States: CPI (SA) (This indicator calculates the annual average CPI YoY) United States: CPI (MoM) United States: Core CPI (YoY, SA) The Relationship Between CPI, Monetary Policy, and Exchange Rates The Consumer Price Index (CPI) reflects the price level, and changes in prices impact the central bank's monetary policy. The central bank's actions, in turn, influence the value of the currency and capital flows in the international market, which are directly related to both consumers and businesses. CPI rises (inflation increases) → Central Bank raises interest rates → Currency appreciates When CPI continues to rise, it signals increasing inflationary pressures. The central bank may raise interest rates to control inflation, causing domestic interest rates to rise, which attracts foreign capital inflows and increases the value of the currency. CPI falls (inflation decreases) → Central Bank lowers interest rates → Currency depreciates When CPI falls, it indicates reduced inflationary pressure, prompting the central bank to lower interest rates to stimulate economic growth. This reduces the currency's attractiveness, leading to capital outflows and causing the currency to depreciate. CPI has a lagging effect, meaning it does not immediately reflect the latest price changes. As a result, central banks do not solely rely on CPI when adjusting interest rates; they also consider other indicators to forecast inflation trends. The Consumer Price Index (CPI) is not only a reflection of the current situation but also a beacon for future economic trends. Whether you're a consumer, business, or government, continuously monitoring and applying CPI data can provide a solid foundation for financial and economic decisions, laying the groundwork for future growth. Sign Up to Track Price Trends ▶ Read More How to Calculate CPI and Inflation Rate? 5 Key Formulas What Is Inflation and How It Affect Your Finances & Investments? .latex { margin-bottom: 2rem; } @media (max-width: 767px) { .latex { overflow-x: auto; white-space: nowrap; } }

US Inflation Barometer: Why Inflation Expectations Matter?

Inflation expectations play a crucial role in macroeconomics, influencing both consumer and business pricing behavior while also serving as a key reference for central bank decision-making. As such, stable inflation expectations are essential for economic stability, maintaining purchasing power, and shaping effective policy formulation. Since Trump announced his bid for the U.S. presidency, debates over whether his potential tariff policies would drive inflation higher have never ceased. Federal Reserve Chair Jerome Powell has repeatedly stated in public appearances that past research indicates if inflation expectations can be effectively "anchored," overall inflation can remain stable even after implementing tariff policies. However, the latest University of Michigan Consumer Sentiment Report highlights that many consumers are increasingly concerned that inflation will reignite next year. The 1-year inflation expectation jumped from 3.3% to 4.3%, marking only the fifth time in the past 14 years that it has surged by a full percentage point in a single instance. Meanwhile, the 5-year inflation expectation also rose to 3.3%, significantly higher than the 2.2%–2.6% range observed over the past two years. So, what exactly is the role of inflation expectations in the economic cycle? Why do central banks worldwide emphasize the importance of "anchoring" this metric? In the following discussion, we will explore the concept, historical development, and significance of inflation expectations, shedding light on how they influence business, labor, and consumer behavior, ultimately shaping macroeconomic stability. Concept of Inflation Expectations Inflation expectations refer to economic agents' projections of future price levels, influencing a broad range of factors, including business pricing strategies, wage negotiations, consumption and investment decisions, as well as government and central bank monetary policy formulation. Powell has previously stated in a 2019 congressional hearing that "inflation expectations" are the most important driver of actual inflation. The primary mechanism through which inflation expectations drive actual inflation is the self-fulfilling mechanism. If the market broadly anticipates future inflation to rise, businesses may preemptively increase prices, and workers may demand higher wages, ultimately fueling actual inflation. Conversely, if inflation expectations decline, inflationary pressures may ease, potentially leading to deflation risks. This is why major central banks around the world have made managing inflation expectations a core objective of monetary policy. Historical of Inflation Expectations The foundation of inflation expectations dates back to Irving Fisher's "Fisher Effect" (1896). Fisher argued that if prices are expected to rise in the future, the real purchasing power of borrowed money would diminish, leading lenders to incorporate compensation for expected inflation into nominal interest rates. Thus, nominal interest rates should theoretically be the sum of real interest rates and inflation expectations. But where do inflation expectations originate? Fisher suggested that while individuals cannot perfectly predict inflation, economic activity, information dissemination, and an increasingly sophisticated understanding of markets would gradually narrow the gap between expected and actual inflation. From this premise, the adaptive expectations theory emerged. This theory posits that individuals adjust their inflation expectations based on a weighted average of past inflation experiences, assuming that people rely on past inflation trends to gradually modify their outlook. Trade-off Between Unemployment and Inflation Expectations: The Phillips Curve In the 1960s, economists extensively studied the relationship between unemployment and inflation, theorizing that expansionary policies to lower unemployment typically led to wage growth and higher inflation—suggesting a trade-off between the two variables, known as the Phillips Curve. (Source: Federal Reserve Bank of St.Louis) However, Milton Friedman challenged this perspective, arguing that workers primarily care about real purchasing power. To maintain stable purchasing power, they would adjust their wage demands based on expected inflation. This implied that the relationship between unemployment and inflation should incorporate inflation expectations. Friedman warned that policymakers attempting to sustain unemployment below its natural rate would have to continuously raise inflation at an "unexpected" pace to outstrip adjusted expectations, ultimately pushing inflation to unsustainable levels. Thus, Friedman cautioned that the inflation-unemployment trade-off was unsustainable in the long run. While unexpected inflation spikes might temporarily reduce unemployment, prolonged high inflation would render this strategy ineffective. The Breakdown of Inflation Control: Phillips Curve Fails By the 1970s, the U.S. government pursued conflicting fiscal policies—expanding spending for the "Great Society" programs and the Vietnam War while simultaneously implementing tax cuts. These measures led to escalating fiscal deficits and deteriorating economic conditions. Compounding the issue, the collapse of the Bretton Woods system in 1973 triggered a sharp depreciation of the U.S. dollar, while soaring food prices fueled inflation. Despite these warning signs, the Federal Reserve relied on the "stop-go" monetary policy approach, where periods of expansionary policy (to lower unemployment) alternated with periods of tightening (to curb inflation). However, as Milton Friedman had forewarned, the trade-off between inflation and unemployment was unsustainable in the long run. In an environment of persistently high inflation, price increases became fully anticipated, diminishing their ability to "surprise" the public and influence real economic variables. Although the Fed was aware of surging inflation, it remained overly focused on full employment, leading to consistently loose monetary policy. As a result, inflation continued to rise in both expansionary and contractionary policy cycles, yet unemployment failed to decline meaningfully during monetary easing phases. This ultimately undermined the effectiveness of the Phillips Curve, setting the stage for the stagflation crisis that followed. The 1979 Oil Crisis and the Rise of Rational Expectations In early 1979, the Iranian Revolution triggered the second oil crisis, exacerbating inflation expectations as energy shortages fueled economic uncertainty. Although the Fed attempted to curb inflation by raising interest rates, persistent high inflation had already eroded public confidence in its ability to control price stability. As a result, inflation soared unchecked, while rising interest rates suppressed investment and employment, plunging the U.S. into stagflation. Read more at Datatrack In response to this failure, economists Robert Lucas and Thomas Sargent revisited the work of John Muth, proposing the "Rational Expectations" Theory. Rational Expectations suggests that individuals incorporate all available information into their forecasts, rather than solely relying on past trends. Consequently, if markets anticipate inflationary policies, consumers and businesses will preemptively act—accelerating inflation through a self-fulfilling prophecy. This framework also implies that people can rationally predict policy shifts. If policymakers attempt to lower unemployment by covertly allowing higher inflation, individuals will recognize this tactic in advance, neutralizing its effectiveness. Breaking Stagflation: Paul Volcker’s Determination By the early 1980s, newly appointed Fed Chair Paul Volcker identified high inflation as the primary threat to future economic growth. He criticized the Fed’s prolonged negligence, arguing that it had severely undermined public trust. To combat inflation, Volcker raised the federal funds rate to nearly 20%, cut monetary supply, and consistently reinforced the Fed’s commitment to inflation control. Though this aggressive tightening plunged the U.S. into recession, pushing unemployment from 7% to 10%, it successfully broke the cycle of inflation expectations. Inflation gradually fell from 14% to around 3% over subsequent years. Read more at Datatrack After the crisis, central banks around the world came to a crucial realization—tolerating high inflation in exchange for temporarily lower unemployment would ultimately backfire as long-term risks accumulated under rational expectations. Instead of debating whether inflation should be allowed to rise in order to reduce unemployment, policymakers began focusing on maintaining public confidence in price stability. This fundamental shift in thinking laid the groundwork for the later adoption of Inflation Targeting. The core principle of Inflation Targeting lies in the explicit establishment of a public inflation target (such as 2%), which serves to anchor long-term inflation expectations and reinforce price stability. At the same time, this framework emphasizes proactive and transparent policy communication to ensure that inflation expectations remain well-anchored over the long run. In the 1990s, the Reserve Bank of New Zealand became the first central bank to adopt Inflation Targeting, achieving notable success. Following its lead, other major central banks—including those in Canada, the United Kingdom, Sweden, and the United States—also gradually incorporated Inflation Targeting into their monetary policy strategies. Application of Inflation Targeting in Recent Economic Crises The adoption of Inflation Targeting has played a crucial role in navigating economic crises over the past two decades. During the 2008 Global Financial Crisis, many economies faced severe risks of recession, and market expectations shifted toward a potential decline in future price levels. This led to weaker consumption and investment activity, increasing the risk of a self-fulfilling deflationary spiral. To prevent prolonged deflation, the Federal Reserve (Fed), the Bank of Japan (BOJ), and the European Central Bank (ECB) implemented multiple rounds of large-scale Quantitative Easing (QE) and aggressively lowered interest rates to stimulate demand. At the same time, they reinforced the importance of Inflation Targeting, which successfully helped prevent deflation from spiraling out of control. During the COVID-19 pandemic in 2020, governments and central banks worldwide implemented unprecedented fiscal and monetary stimulus to support economic activity, causing a rapid rebound in demand. However, global inflation surged due to supply chain bottlenecks, rising energy prices, and labor shortages, fueling concerns over a potential return of stagflation. In response, the Federal Reserve and other major central banks accelerated interest rate hikes in 2022 and launched Quantitative Tightening (QT) to prevent inflation expectations from becoming unanchored. Over the past two years, inflation has steadily declined from a peak of 8-9% to around 2-3%. These events have once again underscored the critical importance of managing inflation expectations in central banks' efforts to control inflation risks. Read more at Datatrack Inflation Expectation Indicators Currently, various inflation expectation indicators are available to both the general public and policymakers for reference: Market-Based Inflation Expectations: 10-Year Breakeven Inflation Rate in the U.S Survey-Based Inflation Expectations:  1-year and 5-year inflation expectations from the University of Michigan Consumer Sentiment Index Professional Forecasts: These consist of projections from institutions such as the Federal Reserve’s "Dot Plot" and the European Central Bank’s (ECB) Survey of Professional Forecasters The historical evolution of inflation expectations highlights their critical role in economic stability and the effectiveness of monetary policy. From the high inflation crisis of the 1970s, to the adoption of Inflation Targeting in the 1990s, to the 2008 Global Financial Crisis, and the resurgence of inflation following COVID-19, inflation expectations have remained a key variable in shaping macroeconomic dynamics. ▶ Read More Why Is CPI Important? Explore its Definition & Impact What Is Inflation and How It Affect Your Finances & Investments?