Monthly Inflation vs. Annual Inflation: Why Does the Fed Target 2%?
Every month, economists receive three important inflation reports: PCE (Personal Consumption Expenditures), CPI (Consumer Price Index), and PPI (Producer Price Index). These track price changes monthly and over 12 months. Monthly increases can also be annualized to estimate what inflation would look like if that pace continued.
The Federal Reserve targets 2.00% annual PCE inflation over the longer run, not necessarily 2% or less every year.
But why 2% instead of zero?
The Fed argues that modest inflation reduces deflation risks, supports wage adjustments, and gives monetary policymakers flexibility during recessions. Question – why do we have recessions or up and downs in markets every nine years or so, who benefits from this vs a neutral inflation over a decade?
Who benefits? Borrowers with fixed-rate debt may benefit when incomes and asset values rise, while savers holding cash can lose purchasing power. Neither outcome is guaranteed.
Here’s my question: Why don’t they discuss cumulative inflation? We’ll examine that shortly.
Headline Inflation vs. Core Inflation: Is This Manipulation?
Headline inflation measures overall price changes, including food and energy.
Core inflation excludes food and energy because those categories frequently experience significant short-term price swings.
But families cannot simply eliminate groceries, gasoline, or electricity from their budgets!
Is excluding them manipulation? Not inherently some say. Core inflation helps economists identify underlying trends. However, emphasizing core inflation while ignoring headline inflation can create a misleading impression of what households actually experience. Many are awakening to this old concept, that can be perceived as manipulation by the public and some analysts.
Both measurements matter, and neither tells the complete story.
What Is Cumulative Inflation or Real-World Inflation?
Cumulative inflation measures the total increase in prices over multiple years, not merely the latest monthly or annual percentage. This is the real-number and why do we not have a report for this?
For example, if inflation increases 5% annually for three consecutive years, cumulative inflation reaches approximately 15.76%, not 15%. But with either number, why do we not track this as a headline stat?
Even when annual inflation slows to 2%, prices generally continue increasing. Lower inflation doesn’t mean prices return to previous levels. The price of your burger, burrito, or steak in 2020, is that price the same as today – most likely not and most likely double. Is the 2020 price ever coming back – most likely not.
For Temecula Valley families, this distinction affects mortgage affordability, down payments, property taxes, homeowners insurance, and household expenses. And most importantly, drives interest rates and interest policy – which drives the costs of monthly housing payments.
Six Important Questions About America’s Purchasing Power
1. What Is a $100 Bill From 1920 Worth Today?
Based on historical CPI comparisons, $100 in 1920 would require roughly $1,800–$1,900 in 2026 to purchase an equivalent basket of goods and services.
Conversely, today’s $100 has approximately $5–$6 of the purchasing power that $100 had in 1920.
Explore the BLS Inflation Calculator.
2. Why Don’t We Track Cumulative Inflation Since 1913?
We actually can!
The Federal Reserve Bank of Minneapolis provides historical CPI data extending back to 1913.
The issue isn’t that cumulative inflation is unavailable. It’s that financial headlines overwhelmingly emphasize monthly and annual changes rather than the long-term erosion of purchasing power. Is this by design, I’ll let you decide.
Would Americans view inflation differently if every report also displayed cumulative purchasing-power losses or how much their currency lost in value that month?
3. Why Did U.S. Currency Become Federal Reserve Notes?
The Federal Reserve Act of 1913 established America’s central banking system.
Federal Reserve Notes entered circulation in 1914, gradually replacing several earlier forms of currency, including national bank notes and Treasury-issued notes.
Importantly, Federal Reserve Notes are aka United States dollars, but are they? And what are they backed by? Some say they are not a different currency, while others contend they are not the same.
Their introduction centralized currency issuance and supported a more coordinated banking and payment system. But again, backed by what – some would say?
Read the Federal Reserve’s Currency History.
4. Why Did America Leave the Gold Standard in 1971?
On August 15, 1971, President Richard Nixon suspended the dollar’s convertibility into gold for foreign monetary authorities.
Growing international dollar claims, declining gold reserves, inflationary pressures, and concerns about the Bretton Woods monetary system contributed to the decision.
The official international gold price had been approximately $35 per ounce.
This accelerated America’s transition toward today’s fiat currency system. Why was it done?
See the Federal Reserve’s History of the Gold Window.
5. What Happened to the Dollar Against Gold?
In 1971, gold’s official price was approximately $35 per ounce.
By October 2026, market prices were around $4,100 per ounce, although gold fluctuates daily.
That represents an increase exceeding 100-fold in gold’s dollar price.
Put differently, the dollar buys dramatically less gold today than it did in 1971.
However, gold prices also reflect investor demand, geopolitical risks, interest rates, and speculation—not inflation alone. Or this is the argument, we are given vs $100 in 1920 is worth $5-$6 in purchasing power in 2026.
6. How Much Purchasing Power Have We Lost Since 2020?
Since the pandemic, cumulative U.S. consumer inflation has exceeded 25%, depending on the exact starting and ending months.
A household spending $4,000 monthly on a representative basket of goods and services in early 2020 could now require more than $5,000 for a comparable basket.
That doesn’t mean every expense increased equally. Housing, insurance, energy, and groceries have followed different paths.
For Temecula Valley mortgage borrowers, rising living expenses can reduce the income available for mortgage payments—even when their fixed mortgage rate hasn’t changed.
Gold, an Italian Suit, and 100 Years of Purchasing Power
Consider a historical illustration: In 1923, gold was officially valued near $20.67 per ounce, rather than $30.
Could an ounce of gold purchase a quality tailored suit, Italian dress shoes, dress shirt, belt, and tie back then?
Possibly, depending on quality and historical prices.
Today, with gold near $4,100 per ounce, an ounce could still purchase a premium clothing ensemble, with Italian shoes for around this price-point.
The comparison illustrates gold’s potential as a long-term store of value and a representation of how the currency has devalued.
Adversely, that same $20.67 or one ounce of gold in 1923 was placed in the ground and dug-up in 2026, what would that $20.67 from 1923 buy today? Crazy when we look at it like this.
Final Thoughts: What This Means for Temecula Valley Mortgages
Monthly inflation captures recent changes. Annual inflation shows the broader trend. Cumulative inflation reveals what decades of rising prices have done to purchasing power.
For homebuyers and homeowners, understanding all three helps explain why mortgage affordability remains challenging even when inflation reports suggest improvement.
Inflation also influences Treasury yields, mortgage-backed securities, and mortgage rates. A lower inflation reading doesn’t automatically guarantee lower mortgage rates, but it sure does help.
Coming Next — Part Three: Transitory Inflation: When Price Pressures Fade and When They Persist.
