How Inflation Works
Inflation is the rate at which the general level of prices for goods and services rises, causing purchasing power to fall. The Consumer Price Index (CPI) is the most common measure.
Future Value = Present Value × (1 + Inflation Rate)Years
Key Inflation Concepts
- CPI (Consumer Price Index): Measures the average change in prices paid by urban consumers for a basket of goods and services
- Core Inflation: CPI excluding volatile food and energy prices
- Hyperinflation: Extremely rapid inflation (typically > 50%/month) — rare in developed economies
- Deflation: Negative inflation — prices falling over time
Frequently Asked Questions
What is a normal inflation rate? The Federal Reserve targets 2% annual inflation. Historical US average is about 3.0-3.5% per year.
How does inflation affect savings? If your savings earn less than the inflation rate, you're losing purchasing power. With 3% inflation, $1,000 today buys only $744 worth of goods in 10 years.
What was the highest US inflation? The highest annual CPI inflation was 23.7% in June 1920. In recent memory, inflation peaked at 9.1% in June 2022.