Inflation
The general increase in the price level of goods and services in an economy over time, reducing purchasing power.
What is Inflation?
Inflation is the rate at which the general price level of goods and services rises over time, resulting in a decline in purchasing power — each dollar buys less than it did before. In the United States, inflation is measured primarily by the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) index. The Federal Reserve targets 2% annual inflation as optimal for economic stability. Inflation can be caused by demand-pull factors (excess demand), cost-push factors (rising input costs), or built-in wage-price spirals. Moderate inflation supports economic growth; high inflation erodes savings, distorts investment decisions, and reduces living standards. Central banks combat inflation primarily by raising interest rates.
Example
US CPI inflation reached 9.1% year-over-year in June 2022 — the highest since 1981 — driven by supply chain disruptions, pandemic-era fiscal stimulus, and rising energy prices. A basket of goods costing $100 in June 2021 cost $109.10 by June 2022. The Federal Reserve responded by raising rates from 0.25% to 5.25% by mid-2023 to slow demand and reduce inflation.
Source: Bureau of Labor Statistics — CPI