What Is Inflation
Last updated: March 31, 2026
Quick Answer: Inflation is the rate at which prices rise over time, reducing the purchasing power of money. When inflation is 3%, something that cost $100 a year ago now costs $103. Central banks typically target 2% annual inflation as healthy.
Key Facts
- The US Federal Reserve targets 2% annual inflation
- Inflation is measured by CPI (Consumer Price Index)
- Hyperinflation exceeding 50%/month has hit Zimbabwe and Venezuela
- Deflation (falling prices) is generally worse than moderate inflation
- The highest US inflation was 23.7% in June 1920
Overview
Moderate inflation (1-3%) is normal and healthy — it encourages spending and investment. High inflation erodes savings and hurts fixed-income earners.
Causes
Demand-pull: Demand exceeds supply, prices rise.
Cost-push: Production costs increase, businesses pass costs to consumers.
Monetary: Money supply grows faster than economic output.
How It's Measured
The CPI tracks average price changes of common goods — food, housing, transport, medical care. Core CPI excludes volatile food and energy.
Winners and Losers
- Winners: Borrowers, asset owners, governments
- Losers: Savers, fixed-income earners, lenders
Related Questions
What is hyperinflation?
Inflation exceeding 50% per month. Prices double in days. Examples: Zimbabwe 2008 (79.6 billion percent monthly), Weimar Germany 1923.
Sources
- Wikipedia — Inflation CC-BY-SA-4.0
- BLS — CPI public_domain