Highlights from Our Inflation-Focused Annual Report

The Federal Reserve Bank of St. Louis released its 2023 annual report, “Prices, Wages and Workers: The Recent U.S. Inflation Experience,” on April 15, 2024.

The main essay of the report features recent research by St. Louis Fed economists whose work helps explain inflation and its effects on the economy. The report also includes messages from St. Louis Fed leadership and a “by the numbers” snapshot of our work on behalf of the Eighth Federal Reserve District.

Read on for highlights. For more details and analysis on the topic of inflation, check out the full report.

The Importance of Price Stability

The Federal Reserve has a mandate to promote price stability in addition to maximum sustainable employment and moderate long-term interest rates.

In the overview section of the main essay, Fernando Martin, an economist and senior economic policy advisor, and David Wheelock, a senior vice president and special policy advisor to the St. Louis Fed president, explained why stable prices are important. They noted how inflation can be frustrating to consumers and possibly hurt their standards of living. Inflation can also interfere with the efficient functioning of the economy, especially when it is high or highly variable.

The Federal Open Market Committee (FOMC) has deemed 2% inflation to be consistent with the price stability goal, Martin and Wheelock noted. As such, the FOMC has a 2% inflation target, as measured by the year-over-year percentage change in the price index for personal consumption expenditures (PCE).

The Rise and Fall of U.S. Inflation

Inflation was low at the end of 2020, but it began rising during 2021, Martin and Wheelock noted.

“At first, inflation was widely expected to be short-lived and involved a relatively narrow group of goods and services,” they wrote. “As the year went on, high inflation proved persistent and more generalized, leading the FOMC to tighten monetary policy with the purpose of returning inflation to its 2% target.”

Year-over-year PCE inflation reached 7.1% in mid-2022 and generally declined through the end of 2023, as shown in the following chart from the essay. The chart also plots the federal funds rate, which is the FOMC’s main policy rate, and the 10-year Treasury yield, which is a measure of long-term interest rates.

Martin and Wheelock looked at several broad categories of spending and found that all of them contributed to high inflation in 2021 and 2022. They pointed out that inflation in food, energy and core goods all fell below 2% annual inflation in 2023. (“Core” means excluding food and energy.)

“In contrast, inflation in core services—the largest consumption category—fell but remained well above 2%, thereby preventing headline inflation from returning back to target in 2023,” they wrote.

Similar Patterns for Excess Savings and Excess Inflation

Martin and Wheelock also examined the rise of households’ disposable income from fiscal policy and high inflation in recent years. They focused on measures of personal saving and inflation relative to normal levels.

They found that accumulated excess personal savings—specifically, the sum of excess savings since January 2016—reached a high point in August 2021 and then steadily declined. Excess inflation had a similar trajectory but with a lag, they added.

“This co-movement underscores the connection between fiscal policy during the pandemic and resulting inflation,” Martin and Wheelock wrote. “While accumulated excess savings and excess inflation both declined since reaching their peaks, inflation declined a bit faster, likely because of tight monetary policy.”

How Inflation Has Impacted Workers’ Wages

To what extent have workers’ wages kept up with inflation? In a section of the main essay, economist Victoria Gregory compared the distribution of real, or inflation-adjusted, wage growth since 2018.

She found that 45% of workers had a decline in their real wages—meaning their personal inflation rate was higher than their nominal wage growth—between 2018 and 2019. In contrast, 54% of workers experienced a decline between 2021 and 2022, which coincided with the peak inflation period.

She noted that the distribution of real wage growth has started to look more like the pre-pandemic distribution, as shown in the following chart from the essay. Overall, 49% of workers had a decline in their real wages between 2022 and 2023.

How the Job Switching Rate Affects Inflation

How has the rate at which workers move from one job to another without an unemployment spell affected inflation? Serdar Birinci, an economist and economic policy advisor, looked at the relationship between the job switching rate and inflation in a section of the main essay.

He noted that an elevated number of workers quit their jobs during the labor market recovery following the COVID-19 recession. The elevated job switching rate raised the annualized inflation rate by an estimated 0.60 percentage points during the 2021-22 recovery period, Birinci noted, citing his recent research with Fatih Karahan, Yusuf Mercan and Kurt See.

Forecasting Headline Inflation

Michael McCracken, an economist and senior economic policy advisor, noted that the Federal Reserve invests a lot of time and energy into forecasting inflation to inform its monetary policy decisions. In a section of the main essay, McCracken asks: How far into the future can current data be used to more accurately forecast inflation?

Summarizing findings from his February 2024 On the Economy blog post with Trần Khánh Ngân, McCracken looked at how accurately year-over-year core PCE inflation predicts future headline PCE inflation relative to a benchmark forecast of 2% (the Fed’s target rate). Core inflation excludes food and energy prices and is often considered a measure of “trend” inflation, he noted.

Before 2021, core PCE inflation was a more accurate predictor of headline PCE inflation than the 2% target was for three, six and nine months into the future, McCracken noted. For the 2021-23 period, core PCE inflation was a more accurate forecast through about 12 months in the future.

Leadership Changes at the St. Louis Fed

Alberto Musalem is the president and CEO of the Federal Reserve Bank of St. Louis.

Alberto Musalem became the St. Louis Fed’s president and CEO on April 2, 2024. In his President’s Message, Musalem discussed a commitment to public service and the Federal Reserve’s mission to promote a healthy economy and financial stability.

“As the 13th president and CEO of the Federal Reserve Bank of St. Louis, my job is to continue to propel the Bank forward as a trusted and innovative partner within the Federal Reserve System in service to the Eighth District and the nation,” he wrote. “I will work tirelessly with my colleagues … to promote a strong, resilient and inclusive economy for all.”

Carolyn Chism Hardy is president and CEO of Chism Hardy Investments LLC.

Carolyn Chism Hardy, who became chair of our board of directors in January, focused on the changes that the St. Louis Fed faced in 2023, including the nationwide search for a new Bank president.

“The Fed’s leadership will continue to be a source of stability as we navigate change throughout 2024,” she wrote in her Chair’s Message.

Snapshot of Our Work on Behalf of the Eighth District

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The people of the St. Louis Fed represent the Eighth Federal Reserve District and the nation in all we do. The Our People, Our Work section of the annual report brings to life our mission and work on behalf of the District last year.

How many data series were in our FRED economic database? How many state member banks did the St. Louis Fed supervise? The infographic highlights these and a few other numbers as of Dec. 31, 2023. Our annual report has many more to explore.

Kristie Engemann, a senior coordinator in the External Engagement and Corporate Communications Division, compiled this blog post.