What is Inflation?
Inflation is the quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. It is the rise in the general level of prices where a unit of currency effectively buys less than it did in prior periods.
Consumer Price Index (CPI)
In the United States, the primary indicator used to calculate inflation is the Consumer Price Index for All Urban Consumers (CPI-U), published each month by the Bureau of Labor Statistics (BLS). The CPI tracks the changes in price of thousands of goods and services typically purchased by urban households, including food, housing, apparel, transportation, medical care, and recreation.
Inflation Formulas
To convert an amount between two years using the Consumer Price Index:
Cumulative Inflation Rate = [(CPIend - CPIstart) / CPIstart] × 100%
Average Annual Rate = [(CPIend / CPIstart)(1 / Years) - 1] × 100%
For theoretical constant annual inflation rate projections (flat-rate model):
Future Purchasing Power = Present Amount / (1 + Rate)Years
Past Equivalent = Present Amount × (1 + Rate)Years
Historical Inflation in the United States
Over the past century, inflation in the U.S. has experienced significant fluctuations. During the 1920s and Great Depression, the country experienced deflation (negative inflation). Following World War II and during the 1970s oil crises, inflation reached double-digit highs (peaking over 13% in 1980). Between 1990 and 2020, inflation remained moderate around 2% to 3% annually, followed by a surge in 2021-2022 due to pandemic supply chain disruptions and fiscal stimulus.