Inflation: what it is, how it’s measured and what it does to money

Inflation is a broad, sustained rise in the prices of goods and services. When it runs at 3%, a basket of everyday purchases that cost $100 a year ago costs about $103 today. The flip side is the part that matters for savers and investors: each dollar buys a little less. Over a single year that loss is easy to ignore. Over a career it is not. A US dollar of January 2000 bought only about half as much in September 2026.

Inflation is also the single number that most shapes interest rates. The Federal Reserve sets policy with one eye on it, bond yields carry a premium for it, and stock valuations swing when it surprises. In 2022, when US consumer inflation reached about 9%, both stocks and bonds fell hard in the same year, which is rare.

This guide explains what inflation is and what causes it, how the US measures it, what the record since 1948 looks like, why the Fed aims for 2%, and how inflation affects cash, bonds and stocks. Deeper pages cover the The CPI report: how BLS builds it and how to read it, Core inflation: why food and energy are left out, the Fed’s preferred PCE inflation: the Fed’s preferred gauge vs the CPI gauge, the Producer Price Index (PPI): final demand, pipeline prices and CPI and inflation-protected bonds in TIPS and breakeven inflation: how inflation-protected bonds work.

What inflation is

The price level is the average price of a broad basket of goods and services. The inflation rate is how fast that level changes, usually quoted as the percentage change from the same month a year earlier. Three related terms are worth separating:

• Deflation is a falling price level, a negative inflation rate. It is rare in the modern US: in the CPI data since 1948, only 40 of 944 monthly year-over-year readings were below zero, most recently in early 2015 and before that in 2008–2009. See Deflation.
• Disinflation is a falling inflation rate that stays positive, for example from 9% to 3%. Prices are still rising; they are just rising more slowly. Prices almost never go back to where they were.
• Hyperinflation is extreme inflation, conventionally prices rising by tens of percent a month. It has not happened in the US in the modern era.

A one-time jump in a single price is not inflation in this sense. If coffee doubles while other prices are flat, the coffee drinker feels it, but the price level barely moves. Inflation is about the broad average, and about a rise that persists.

How inflation is measured

The US publishes several price indexes. They all follow the same idea: pick a basket, weight each item by how much is spent on it, price the basket regularly, and report the change.

• The Consumer Price Index (CPI), from the Bureau of Labor Statistics (BLS), prices what urban households buy out of pocket. Its main version, CPI-U, covers more than 90% of the US population, and BLS records about 80,000 item prices a month. It is the headline number on the news, and a CPI measure sets the principal of TIPS. Details: The CPI report: how BLS builds it and how to read it.
• The Personal Consumption Expenditures (PCE) price index, from the Bureau of Economic Analysis (BEA), has a broader scope and a different formula. It is the measure the Federal Reserve’s 2% goal is written in. Details: PCE inflation: the Fed’s preferred gauge vs the CPI.
• Core versions of both exclude food and energy, whose prices swing the most, to show the underlying trend. Details: Core inflation: why food and energy are left out.
• The Producer Price Index (PPI) measures prices received by US producers, not paid by consumers. Details: Producer Price Index (PPI): final demand, pipeline prices and CPI.

A worked example with BLS data: the seasonally adjusted CPI-U stood at 336.298 in September 2026 and 324.245 in September 2025. 336.298 ÷ 324.245 = 1.0372, so prices rose 3.7% over the year, the same 3.7% BLS reported in its September 2026 release (which uses unadjusted data). Index points mean nothing on their own; the CPI is scaled so that its 1982–84 average equals 100.

US inflation since 1948

The chart shows that low and stable inflation is the US norm, but not a guarantee. Three episodes stand out:

• The late 1940s and early 1950s brought short bursts of inflation and deflation, with 12-month readings as low as −3.0% (August 1949).
• The Great Inflation, roughly 1966 to 1982. Inflation ratcheted higher in waves, reaching 12.1% in December 1974 and peaking at 14.6% in March 1980. Only after the Fed pushed short-term rates to record highs did it fall, to 3.8% by December 1983. The same era gave the word Stagflation: high inflation, weak growth and the 1970s lesson to high inflation with high unemployment.
• The 2021–2022 surge. After a decade in which CPI inflation averaged about 1.6% (2012 to 2019), it climbed from 1.3% in December 2020 to 9.0% in June 2022 on the seasonally adjusted series (BLS’s headline unadjusted figure was 9.1%). It eased to 3.3% by December 2023 and 2.7% by December 2025, then rose again during 2026, to 3.7% in September.

Average annual inflation by decade, measured from January to January on the CPI-U:

Two lessons come out of the table. First, a "normal" decade in the US has run between 2% and 3%. Second, the bad decades are not mild: a decade at 7.5% cuts the value of money roughly in half in ten years.

What causes inflation

Economists group the causes into a few families. They are not exclusive; real episodes usually combine them.

• Demand-pull. Total spending grows faster than the economy can produce. Strong household demand, large government deficits or very low interest rates can all push spending ahead of capacity, and sellers raise prices because they can.
• Cost-push. A major input becomes more expensive and the cost is passed along. Energy is the classic case: oil feeds transport, heating, plastics and fertilizer. Energy prices are the most volatile part of the CPI, which is why energy shocks show up first in headline inflation. See Oil prices and the economy: WTI, Brent, gasoline and inflation.
• Expectations and wages. If workers and firms expect high inflation, workers bargain for larger raises and firms set prices higher in advance, which can make inflation persist after the original shock has passed. That is why central banks care so much about keeping expectations "anchored". See Wage growth: average hourly earnings, real wages and composition.
• Money and credit. Over long periods, inflation is linked to how fast the money supply grows relative to output. The link is loose year to year; see Money supply and M2: what it measures and what it tells you.

The Federal Reserve’s own long-run statement says the inflation rate "over the longer run is primarily determined by monetary policy". In the short run, supply shocks can move inflation on their own, but whether a burst becomes a lasting trend depends a great deal on how the central bank responds.

Purchasing power: what inflation does to money

Purchasing power is what a fixed amount of money can buy. The CPI-U was 169.3 in January 2000 and 336.298 in September 2026, so prices roughly doubled (×1.99). A $100 bill kept in a drawer for those 26 years and 8 months bought about $50 worth of goods at the end. That works out to an average loss of purchasing power of about 2.6% a year.

Inflation compounds the same way interest does, only against you (see Compound interest: how growth on growth builds wealth). A handy shortcut is the rule of 72: divide 72 by the inflation rate to get the rough number of years for prices to double, and for cash to lose half its value.

The exact column is ln(2) ÷ ln(1 + rate). The difference between 2% and 4% inflation looks small in a single year and enormous over a working life: half your savings’ value in 35 years versus in 18.

A second worked example, on income. If your salary is $50,000 and prices rise 3.7% in a year, you need a raise of $1,850, to $51,850, just to stand still. A 2% raise in that year is a pay cut in real terms: 1.02 ÷ 1.037 − 1 = −1.6%.

Why the Fed aims for 2%

The Federal Open Market Committee (FOMC) first published its numerical goal in January 2012 and reaffirmed it effective January 27, 2026. The statement judges that "inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures" is most consistent with the Fed’s mandate of maximum employment and stable prices. On its FAQ page, the Fed explains that low, stable inflation helps households and businesses make sound decisions about saving, borrowing and investing.

Why 2% rather than 0%? Economists usually give three reasons. Price indexes tend to overstate true inflation slightly, because quality improvements and new products are hard to capture, so measured 0% could mean real prices are falling. A small positive inflation rate keeps nominal interest rates higher on average, which leaves the central bank more room to cut in a downturn. And mild inflation makes it easier for real wages and relative prices to adjust without anyone having to accept a nominal pay cut. The Fed also stresses keeping expectations "well anchored at 2 percent", because expectations feed into wages and prices. How the Fed uses its tools to get there is covered in The Federal Reserve: structure, mandate and policy tools.

Inflation and your investments

Every investment has a nominal return (what the statement shows) and a real return (what it buys). The second is the one that matters for long-run goals; see Real return. Inflation affects the main asset classes differently.

Cash

Cash in the bank or in Treasury bills earns a short-term interest rate that the market sets mostly from the Fed’s policy rate. The question is whether that rate beats inflation. Using the 3-month Treasury bill rate minus CPI inflation, monthly averages:

In 2022 the bill rate averaged 2.0% while CPI inflation ran around 6% to 9%, so cash lost about 6% of its purchasing power in one year even though its dollar value never fell. Cash protects against nominal losses, not against inflation. More: Money market funds and cash: T-bills, savings and real returns.

Bonds

A conventional bond pays fixed dollar amounts. Higher inflation hurts it twice: the fixed coupons buy less, and the market demands higher yields on new bonds, which pushes existing bond prices down. Long bonds suffer most because they have more distant fixed payments (see Bond prices and yields: why prices fall when yields rise and Duration). In calendar 2022, the CPI rose 6.4% from December to December. On Finabase’s monthly closes, the iShares 20+ Year Treasury Bond ETF (TLT) fell 32.8% on a price basis (December 2021 close $148.19 to December 2022 close $99.56; interest payments excluded). Treasury Inflation-Protected Securities are built to avoid the first problem, though not the second; see TIPS and breakeven inflation: how inflation-protected bonds work.

Stocks

Stocks are claims on businesses whose revenues rise with prices over time, so over long periods they have beaten inflation by a wide margin. On Finabase’s monthly data, the SPDR S&P 500 ETF (SPY) compounded at about 9.0% a year in price alone from March 2006 to October 2026, while the CPI rose about 2.6% a year over nearly the same span.

In the short run the picture is messier. Rising inflation usually brings higher interest rates, and higher rates lower the present value of future profits, hitting long-duration growth stocks hardest. In 2022 SPY fell 19.5% on a price basis (December close $474.96 to $382.43), in the same year as TLT’s fall. That combination, stocks and bonds down together, is what made 2022 painful for diversified portfolios; see The 2022 bear market: inflation, Fed hikes and falling bonds and How interest rates affect stocks: discount rates and equity duration. Companies with pricing power, short-lived assets and low debt tend to cope with inflation better than those with fixed-price contracts or heavy borrowing needs, but this varies widely.

Real assets

Commodities, real estate and gold are often described as inflation hedges. The record is mixed: they can track inflation over some stretches and diverge sharply over others. See Gold and precious metals: how gold is priced and what drives it and Commodities explained: energy, metals, crops and how to own them for the data.

How to read inflation numbers

• Year-over-year vs month-over-month. The y/y rate is smooth but slow: it still contains price moves from eleven months ago. The m/m rate is current but noisy. Analysts often annualize recent months, for example a 0.3% monthly rise is about 3.7% a year (1.003¹² − 1). Core inflation: why food and energy are left out covers this in detail.
• Base effects. A big monthly jump drops out of the y/y figure exactly a year later, which can make y/y inflation fall sharply even if prices keep rising at a normal pace.
• Headline vs core. Headline includes food and energy; core strips them out. Energy moved headline CPI far from core in 2026: in September, energy prices were up 20.4% over the year while core CPI was up 2.6% (BLS).
• Surprises move markets, not levels. Markets price the expected number before release day. The reaction comes from the gap between the actual figure and the consensus; see How markets react to economic data: surprises, regimes, revisions.

Pitfalls and limitations

• Your inflation is not the average. The CPI weights reflect average urban spending. A renter who drives a lot, a retiree with high medical bills and a homeowner with a fixed mortgage all face different rates.
• Quality and substitution are hard to measure. A phone that costs the same but does more is, in effect, cheaper. Statisticians adjust for this, imperfectly. The CPI-U also uses a fixed-basket-style formula that reacts slowly when consumers switch to cheaper items, one reason it tends to run a little above PCE.
• Data gaps happen. A lapse in federal appropriations from October 1 to November 12, 2025 stopped BLS price collection, and BLS did not publish most October 2025 CPI indexes. It filled the gap by carrying September prices forward, and notes that this may slightly understate inflation when prices are generally rising. Anyone computing 12-month changes from a monthly table needs to match dates rather than count rows, or the months after the gap become 13-month changes.
• Revisions. Unadjusted CPI-U figures are final when published, but PCE inflation is revised as BEA receives more complete data. See Seasonal adjustment and data revisions: why the numbers change.

Inflation measures compared

How Finabase does it

Finabase does not carry CPI, PCE or other macroeconomic data series, and it has no economic calendar. The two charts on this page are ours, drawn from public BLS data downloaded through FRED on October 30, 2026.

What the app does show is how markets price inflation. The Treasury page lists yields from 1 month to 30 years with 1-week to 2-year changes; comparing a short bill yield with the latest CPI reading is a quick check on whether cash is earning a real return. The iShares TIPS Bond ETF page charts a fund of inflation-protected Treasuries. Commodity futures that feed energy and food prices, such as WTI crude oil, are on the futures page. Inflation headlines appear in the economy topic of Discover and the news feed.

Frequently asked questions

What is a normal rate of inflation?

About 2% a year is what the Federal Reserve targets, measured with the PCE price index. US CPI inflation averaged about 3.4% a year from 1948 to 2026 and about 1.8% a year in the 2010s, so "normal" depends on the era you compare with.

Is inflation good or bad for stocks?

Moderate, stable inflation has been compatible with strong stock returns over long periods, because company revenues rise with prices. Rising or surprising inflation tends to hurt in the short run, because it pushes interest rates up and valuations down, as in 2022.

Does falling inflation mean prices are falling?

No. Falling inflation, or disinflation, means prices are rising more slowly. Prices fall only during deflation, when the inflation rate is negative.

Why do CPI and PCE give different numbers?

They use different formulas, weights and scope. PCE covers spending made on households’ behalf, such as employer-paid health insurance, and adjusts faster when consumers switch products. From 2000 to 2019, CPI inflation ran on average about 0.3 percentage point above PCE. See PCE inflation: the Fed’s preferred gauge vs the CPI.

How can I protect savings from inflation?

There is no single protection, and this guide does not recommend any. The tools investors commonly study are assets whose payments rise with prices, such as TIPS and I bonds, and assets that have historically outpaced inflation over long horizons, such as stocks, each with its own risks. See TIPS and breakeven inflation: how inflation-protected bonds work and Asset classes explained: stocks, bonds, cash, real assets and more.

Summary

Inflation is the pace at which the general price level rises, and the pace at which money loses purchasing power. The US tracks it with the CPI and PCE price indexes, plus core versions that drop food and energy. Since 1948 CPI inflation has averaged about 3.4% a year, with a 14.6% peak in 1980, a decade of under 2% in the 2010s, a 9% surge in 2022 and a reading of 3.7% in September 2026. The Fed aims for 2% on PCE because stable, low inflation helps people plan. For investors the key idea is real return: cash and fixed-coupon bonds lose purchasing power when inflation surprises upward, while stocks have outpaced inflation over long periods but can fall sharply when inflation drives interest rates higher.