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Inflation

$$\text{Inflation Rate} = \frac{\text{CPI}_{\text{current}} - \text{CPI}_{\text{previous}}}{\text{CPI}_{\text{previous}}} \times 100$$

Use the Inflation Calculator → Try the Inflation Quiz →

What is Inflation?

Inflation is the rate at which the general level of prices for goods and services rises over time, reducing the purchasing power of money. It is measured using a price index - most commonly the Consumer Price Index (CPI) - which tracks the cost of a fixed basket of typical household purchases month by month.

Central banks in most developed economies target roughly 2% annual inflation. Mild inflation is considered healthy because it encourages spending (items cost more later, so buy now) and allows businesses to adjust wages and prices gradually. Deflation - falling prices - is generally considered more dangerous because it triggers delayed purchases and debt deflation spirals.

Inflation explained to a beginner

Imagine a coffee costs $2 today. If inflation runs at 3% per year, that same coffee costs $2.06 next year, $2.25 in five years, and $4.85 in thirty years. Your dollar has not disappeared - but it buys less each year.

A 3% annual inflation rate halves the purchasing power of your money in about 24 years. This is why savings accounts that pay below the inflation rate are quietly losing real value.

When to use Inflation

Use the inflation rate when comparing prices, wages, or values from different time periods. A salary of $50,000 in 1990 was worth far more in real terms than $50,000 in 2025 - adjusting for CPI gives the true comparison. Inflation data is also central to interest rate policy, bond pricing, pension planning, and any real vs. nominal return analysis.

Worked examples for Inflation

This table quickly gives you the overview you need to understand Inflation and its most important comparisons.

Year	US CPI-U	Annual rate	Value of $100 (in 2025 $)
1913	9.9	baseline	$3,238
1950	24.1	+3.1%	$1,329
1973	44.4	+6.2%	$721
1980	82.4	+13.5%	$389
2000	172.2	+3.4%	$186
2010	218.1	+1.6%	$147
2022	292.7	+8.0%	$109
2025	320.6	+2.3%	$100

Common pitfalls

CPI measures the average price change for a typical household basket. Your personal inflation rate may differ significantly depending on your spending pattern. Homeowners experience different inflation than renters; heavy commuters are hit harder by fuel price spikes. Core inflation (excluding food and energy) is a separate measure used by central banks to filter out volatile items. Do not confuse the inflation rate (%) with the price level (index): an inflation rate of 0% does not mean prices fell - it means they stopped rising.

Frequently asked questions about Inflation

What is the difference between CPI and core inflation?

CPI measures all items in the household basket, including food and energy, which are volatile. Core inflation removes food and energy to give a cleaner signal of underlying price trends. Central banks focus on core inflation because supply shocks in food or oil markets are temporary - monetary policy cannot fix a crop failure. The Fed targets PCE inflation (a related but different index) rather than CPI directly.

Is a 2% inflation target standard worldwide?

Not universally, but 2% has become the de facto global standard for developed economies. The US Federal Reserve, European Central Bank, Bank of England, Bank of Japan, and Reserve Bank of Australia all target approximately 2% annual CPI or PCE inflation. Emerging markets often target higher rates - India targets 4%, Brazil has a 3% target. The 2% threshold balances the benefits of mild inflation against the risks of deflation.

Why does inflation hurt people on fixed incomes most?

Fixed-income recipients - retirees on fixed pensions, holders of fixed-rate bonds, workers without cost-of-living adjustments - receive the same nominal payment each year. As prices rise, each payment buys less. A $2,000 monthly pension in 2000 had the buying power of roughly $3,360 by 2024. Without a COLA adjustment, the pensioner effectively took a 40% real pay cut over that period.

Test your knowledge

Quiz: how well do you know inflation?

3 questions · ~1 min

1. What does a CPI reading of 300 mean when the base year was set at 100?

ℹ A CPI of 300 with a base of 100 means prices have tripled (increased by 200%). The index represents the current cost of the basket as a percentage of its base-year cost. CPI 300 = the basket costs 3x more than in the base year, not 300% more.

2. Which of these best describes "deflation"?

ℹ Deflation is a negative inflation rate - the general price level falls. It is distinct from disinflation (inflation slowing but remaining positive). Japan experienced sustained deflation from the late 1990s through the 2010s. It is considered dangerous because falling prices encourage consumers to delay purchases, which depresses economic activity.

3. According to the examples table, approximately what was the value of $100 in 1980 money when expressed in 2025 dollars?

ℹ $100 in 1980 US dollars is worth approximately $389 in 2025 terms, reflecting the roughly 4x rise in the CPI-U from 82.4 in 1980 to 320.6 in 2025. The 1970s and early 1980s saw extremely high inflation which significantly eroded earlier purchasing power.