The Federal Reserve has two fundamental mandates: maximum employment and stable prices with an upper limit it sets for an acceptable inflation rate!

When employment reaches a level that known as full and a strong economy results in a shortage of available qualified workers, upward wage pressure can cause the inflation rate to rise.

Similarly, when commodity prices rise, the components that go into finished products become more expensive and if manufacturers and retailers are able to pass the increase along to the consumer, inflation will also increase.

The monetary policy solution at the disposal of the Fed to fight inflation and cool an overheating economy is to raise short-term interest rates which they accomplish through fed funds.

Any increase in the fed funds rate will typically be felt in most of the interest rates that consumers are subject to, such as mortgages.

From the website Wealth Management…

‘It’s troubling how little we understand inflation even as the Federal Reserve is busy boosting interest rates. Consensus is far from settled on what causes inflation, how to measure it, what the optimum rate of inflation should be and how to move the rate up or down.’

The charts below (courtesy of http://KathleenKowal.com) help provide an overview.

(Click on image to enlarge)