US inflation → Policy rates

Common explanation (Cause · same direction): When a country’s inflation is above target, its central bank raises rates.

This issue: US inflation at 64 (warm), Policy rates at 85 (hot) — both above normal, in line with the common explanation.

Hot and cold describe position, not good or bad: warm does not mean a fall is coming, and an extreme reading does not mean a quick reversal. We describe history only, with no buy or sell advice.

Where it stands now

Where the two indicators stand this issue

US inflation: 0.41 percentage points above its 10-year average. Policy rates: Median position across economies 85.

Tests

Does this link hold up?

Common explanationWhen a country’s inflation is above target, its central bank raises ratesSource: Bank for International Settlements, “I. Navigating the disinflation journey” (2023).
Tested against our dataAgreement between the positions of US inflation and Policy rates (6-month lag), measured in the direction of the common explanation: +0.54. Looking at every 5-year period (shifted one year at a time), the two moved in that direction in all 14, but that does not mean they always will; data start only in 2007. Supported by the data
Periods when it did not holdAcross 14 5-year periods, out of step in none.

History

The two lines, overlaid

Data: US: Bureau of Labor Statistics, via FRED (Federal Reserve Bank of St. Louis); Japan: World Bank Global Economic Monitor (CC BY 4.0); others: OECD; Bank for International Settlements (BIS), central bank policy rates; Taiwan: Central Bank of the Republic of China (Taiwan). Positions: our calculation.

US inflationPolicy rates

Time lag

At what lag do they match best?

Longer bar = moves more in the direction of the common explanation (the number is the agreement).

same month+0.52
3-month lag+0.56
6-month lag+0.54
9-month lag+0.51
12-month lag+0.43
18-month lag+0.37

Limits

What this card cannot tell you

Moving together does not prove that one causes the other.
Links change over time; periods when this one did not hold are listed in full.
This is the historical record, not a forecast.

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