Inflation
Inflation is the annual percentage increase in the average price of a basket of consumer goods and services. As prices rise, each dollar buys fewer goods — meaning the purchasing power of money erodes over time.
The Inflation Formula
Inflation Rate = ((CPI_current − CPI_prior) / CPI_prior) × 100
The Consumer Price Index (CPI) is published monthly by the US Bureau of Labor Statistics and tracks prices for housing, food, transportation, healthcare, and more.
Purchasing Power Erosion
| Starting Value | After 10 Years (3% inflation) | After 20 Years | After 30 Years | |---------------|------------------------------|----------------|----------------| | $100,000 | $74,409 | $55,368 | $41,199 |
Types of Inflation
- Demand-pull: Consumer demand exceeds supply, pushing prices up
- Cost-push: Rising production costs passed on to consumers
- Built-in: Wage increases trigger price increases in a self-reinforcing cycle
Historical US Inflation Rates
- 2% target: The Federal Reserve's stated goal for healthy economic conditions
- 1970s: Peak of ~14% (energy crises and loose monetary policy)
- 2021–2022: Peaked ~9% due to COVID supply chain disruptions and stimulus spending
Related Tools
- Inflation Calculator — Convert historical dollar values using actual CPI data.
- Retirement Calculator — Project inflation-adjusted retirement income.
- Compound Interest Calculator — Model returns that beat inflation.
→ Read the full guide: How Inflation Works