Inflation is a general rise in prices of goods and services over time and involves a decline in purchasing power. It cannot be measured by an increase in the cost of a single product or service, nor in the costs of several products and services.
Instead, inflation involves a general rise in the overall price level of the goods and services in a country’s economy.
This guide explains what inflation is, how it’s measured, how to read an inflation report, and how to use an inflation calculator, while also addressing the causes and effects of inflation, the current inflation rate, and historical data about the highest inflation in US history.
You’ll also find out how to counteract the impact of inflation and how Bitcoin can help.
What is Inflation?
In simple terms, inflation can be defined as a general increase in the overall costs of products and services over time, leading to a fall in purchasing power.
The US Federal Reserve’s official inflation definition states that “inflation is the rise in the prices of goods and services over time”, explaining that inflation cannot be measured by a rise in costs of a single product or service or by measuring the prices of only a few products and services. Instead, it’s necessary to take into consideration the overall price level of the goods and services in the economy.
The Federal Reserve policymakers evaluate changes in inflation by monitoring various price indexes – a price index measures the changes in prices of a group of goods and services.
The Fed takes into consideration various price indexes because different indexes track different products and services, and these indexes are calculated differently, and can highlight various signals about inflation.
Nominal Value vs Real Value
In economics, the nominal value refers to the value measured in terms of absolute money amounts, and the real value is considered and measured against the actual goods or services for which it can be exchanged at a certain time.
Real value takes into account inflation and an asset’s value in relation to its purchasing power.
The real GDP (Gross Domestic Product) compensates for inflation, so economists can exclude inflation from growth figures and see how much an economy actually grows. Nominal GDP includes inflation and, therefore, it’s higher.
Headline Inflation vs Core Inflation
Headline inflation represents the total inflation in the economy. The headline inflation includes inflation in a basket of goods (commodities like food and energy).
Core inflation excludes food and energy prices when calculating inflation.
How We Measure Inflation
The Fed uses the following measures of inflation:
- CPI (Consumer Price Index), issued by the Department of Labor, is a key indicator of inflation and measures the average change over time in the prices paid by urban consumers for a basket of consumer goods and services; a rise in CPI reflects an increase in the cost of living for households.
- PCE (Personal Consumption Expenditures) is a key economic indicator of consumer spending on goods and services in the US economy; the PCE price index is produced by the Department of Commerce, and it’s most consistent over the longer run with the Fed’s mandate for maximum employment and price stability.
- PPI (Producer Price Index), issued by the Department of Labor, is a key economic indicator that measures the average change over time in the selling prices received by domestic producers for their output; it serves as an early measure of inflationary pressure, tracking price changes from the producer’s perspective.
- GDP Deflator, a measure of the price level of all new, domestically produced, final goods and services in the economy, calculated by dividing nominal GDP by real GDP; this is a broad measure of inflation
The US Fed’s preferred inflation measure is the PCE because it covers a wide range of household spending.
Inflation Chart: Trends Over Time
On its official website, the US Bureau of Labor Statistics shows the CPI over the past 20 years, for selected categories, including monthly CPI YoY and core CPI YoY.
The chart for core inflation YoY over the past 20 years shows the variations of core CPI, including data for all items less food and energy, between September 2005 and September 2025.
The key core CPI trends observed during this period are the following:
- 2005-2008 – Inflation remained between 2% and 3% with some fluctuations before the 2008 financial crisis.
- 2008-2009 (Recession Period) – Inflation dropped briefly, falling to 0.6% in October 2010, mirroring the global economic slowdown.
- 2010-2019 (Post-Crisis Stability) – Inflation recovered and remained stable between 1.5% and 2.5% for almost a decade, reflecting a period of relative price stability and economic growth.
- 2020 (COVID-19 Pandemic Shock) – Inflation dropped to 1.2% in May 2020 during the COVID-19 lockdowns as demand collapsed.
- 2021-2022 (Inflation Surge) – Core CPI spiked, reaching 6.6% in September 2022, driven by supply chain disruptions, fiscal stimulus, and a rising post-pandemic demand.
- 2023-2025 (Disinflation Phase) – Core CPI declined steadily, reaching levels above 3% by the end of 2024, and then stabilized at higher levels compared to the pre-pandemic period.
The headline inflation YoY chart for the past 20 years shows the following data:
- 2005-2008 (Pre-Crisis Inflation) – CPI fluctuated between 2% and 5%, peaking at 5.6% in July 2008, just before the financial crisis, driven by a price rise for energy and commodities.
- 2008-2009 (Global Financial Crisis) – CPI collapsed and turned negative, dipping at -2.1% in July 2009, marking a period of deflation caused by the collapse in demand and falling oil prices during the recession.
- 2010-2019 (Post-Crisis Stability) – CPI recovered to moderate levels, remaining between 1% and 3% for about a decade, marking a period of stable growth and lower interest rates.
- 2020 (Pandemic Shock) – CPI dropped to 0.1% in May 2020 as the pandemic reduced global demand and disrupted supply chains.
- 2021-2022 (Inflation Surge) – CPI spiked, hitting 9.1% in June 2022, marking the highest inflation in the past 40 years and being caused by supply shortages, energy price spikes, fiscal stimulus, and post-pandemic recovery.
- 2023-2025 (Disinflation Phase) – Inflation declined as the Fed raised interest rates and began QT; since June 2025, CPI has risen, reaching 3% in September, still above pre-pandemic norms.
Inflation Calculator by Year
The US Bureau of Labor Statistics provides a CPI Inflation Calculator on its official website, which you can use to see the buying power of a specific amount of money in various years.
The CPI Inflation Calculator uses the CPI for all urban consumers (CPI-U), the US city average series for all items, not seasonally adjusted. The data represent changes in the prices of all goods and services purchased for consumption by urban households.
What Causes Inflation?
Inflation is caused by various events, including the following:
- Wars, global crises
- Increased consumer demand
- Rising raw material and wage costs
- Supply chain disruption
- Expansionary monetary or fiscal policies
- Tariffs
Demand-Pull vs Cost-Push vs Built-In Inflation
Based on causes and developments, there are three types of inflation:
- Demand-pull inflation when demand outstrips supply
- Cost-push inflation when production costs surge
- Built-in inflation triggered by expectations of future price increases
Here’s a comparison between the three types of inflation.
| Type of Inflation | What It Is | Key Characteristics |
|---|---|---|
| Demand-pull inflation | Inflation that happens when there is too much money chasing too few goods |
|
| Cost-push inflation | Inflation that occurs when the costs of producing goods and services increase |
|
| Built-in inflation | A self-reinforcing cycle of rising wages and prices, also called a wage-price spiral |
|
So, whenever you wonder why inflation is so high, you must first analyze the internal/external factors that might be triggering it and compare the current situation with other historical events when inflation spiked.
Do Tariffs Cause Inflation?
Tariffs also cause inflation via multiple factors, including the following:
- Import costs – When a country imposes tariffs on imported goods, the costs of bringing those goods into the country surge; businesses that rely on imported goods are faced with higher costs.
- Pass-through – High taxes are passed on to consumers as higher prices, increasing the CPI and leading to a strong inflationary effect.
- Retaliation risks – When a country imposes tariffs on another, the latter often retaliates with its own tariffs on the first country’s exports, which can lead to disrupted trade and reduced supply of certain imported goods; retaliatory tariffs can reduce the supply chain’s efficiency, increasing import prices further.
What is the Current Inflation Rate?
The CPI for September 2025 (for all items) YoY is 3%, and the core CPI YoY (excluding food and energy) is also 3%, according to official data.
The current inflation rate in the US can be found on the official website of the US Bureau of Labor Statistics. The chart covers the YoY monthly percentage change for CPI for selected categories over the past 20 years.
In August 2025, the CPI was 2.9% YoY, which shows that inflation has grown in the US above the Fed’s target of 2%.
How to Calculate the Inflation Rate
Here’s the inflation rate formula:
(Price Index this period−Price Index prior period)÷Price Index prior period×100
To calculate the inflation rate for September 2025, we used the CPI inflation calculator, taking $1,000 as the price index example for September 2024.
Based on the CPI inflation calculator, $1,000 in September 2024 equals $1,030.13 in September 2025 in terms of purchasing power. In other words, the prices rose enough that you needed $1,030.13 in September 2025 to buy what $1,000 used to buy in September 2024.
Based on the inflation rate formula above, the inflation rate is: (1,030.13-1,000)/1,000 x 100 = 3.01%. This is the inflation rate in September 2025 for a specific product/service that was $1,000 in September 2024.
In the US, according to the official Fed data, the CPI in September 2025 was 3% compared to September 2024 when it was 2.4%, rising 0.6% YoY.
Highest Inflation in US History
The highest inflation in the US was during WWI, when CPI rose 20% cumulatively during the war years. Between 1914 and 1918, there was war spending, disrupted supply chains, shortages of goods, and an expansion of the money supply to fund military efforts.
The US recorded more notable inflation-related events during its history, including major inflation spikes that occurred during wars, supply shocks, or periods of rapid monetary/fiscal expansion, or disinflation periods with aggressive monetary policy and/or stabilization of supply-demand imbalances.
These historical events show that inflation can be driven by external factors like oil shocks or war, or by internal policies such as loose monetary/fiscal policies.
Here are the most important inflation-related events, including key causes and context:
| Period / Event | Key Inflation Facts | Causes & Context |
|---|---|---|
| World War I (1914–1918) | Major price increases in many countries; U.S. CPI rose ~20% cumulatively during war years. | War spending, disrupted supply chains, shortages of goods, and expansion of money supply to fund military efforts. |
| 1940s / WWII & Postwar | Inflation spiked during WWII (~10–15% annually in the U.S. in some years) and postwar years. | Massive government spending, rationing, and later release of pent-up consumer demand. Postwar price controls lifted, creating sharp price increases. |
| 1970s Great Inflation | U.S. annual CPI inflation reached double digits (~13.5% peak in 1980). | Oil shocks (1973, 1979), loose monetary policy, wage-price spirals, and declining productivity growth. |
| Early 1980s Volcker disinflation | Federal Reserve under Paul Volcker raised interest rates to ~20%, bringing inflation down from double digits to ~3–4% by mid-1980s. | Monetary tightening to break entrenched inflation expectations; led to a deep but short recession. |
| 2021–2022 Spike | U.S. inflation jumped to ~9.1% YoY in June 2022 (highest since 1981). | Pandemic-related supply chain disruptions, fiscal stimulus, pent-up demand, labor shortages, energy price spikes (especially after Russia invaded Ukraine in Feb 2022). |
Why Is Inflation Bad? The Real-World Effects
When a country has high inflation, this can lead to multiple real-world effects that impact the nation’s economy, its citizens, and businesses:
- The overall purchasing power of money decreases, and the same amount will buy less compared to the period before inflation.
- Households with fixed incomes are the most affected as prices rise, as their money has less purchasing power, especially if salaries don’t rise.
- Savers who choose fiat money for their savings are affected because the overall value of their savings decreases.
- High inflation can lead to higher interest rates on mortgages, increasing debt costs, and hurting people’s budgets.
- Businesses are also hurt by rising inflation, making planning, inventory management, and investing more difficult, as future costs and prices become higher and unpredictable.
- Tax bracket creep pushes people into higher tax brackets, even if their real income hasn’t grown; nominal gains are taxed even when real gains are low.
- High inflation rates can lead to central banks implementing tighter monetary policy called quantitative tightening (QT), resulting in less capital flowing into the economy.
Is Inflation Always Bad?
While high inflation rates are bad for a country’s overall economy and its people, an average inflation rate is not destructive.
The benefits of low, stable inflation include the following:
- Wage flexibility – With a lower inflation of approximately 2%, employers can adjust real wages easier, without having to cut nominal pay; firms can adjust labor costs, preventing higher rates of unemployment.
- Debt sustainability – Lower inflation can reduce the real value of debt over time, making repaying loans easier, preventing a debt crisis.
The risk of deflation is that falling prices can make debt harder to repay because the real value of what is owned increases, and consumers may delay spending, expecting lower prices later – this reduces demand and hurts the overall economy. When prices fall, the businesses’ revenues also drop, which leads to layoffs and recessions.
This is the main reason why central banks target a lower inflation rate (like the US Fed’s 2% target) because it provides:
- Stability
- Flexibility
- Protection against the dangers of deflation
How to Counteract the Impact of Inflation
Despite the fact that higher inflation rates hurt the overall economy of a country, households and businesses can counteract the effects of inflation via multiple methods.
Advice for Households
Households can combat the effects of inflation by following these steps:
- Investing in TIPS (Treasury Inflation-Protected Securities) and I Bonds (government bonds that adjust with inflation) – Savers can maintain real purchasing power.
- Investing in broad stock index funds (including S&P 500 ETFs) – Households can grow wealth at a faster pace compared to the rising inflation over time; companies’ stocks can raise prices when inflation surges, offering protection.
- Having high-yield cash accounts – Keeping emergency funds in high-yield savings or money market accounts prevents the decline of cash value as these accounts adjust rates quicker than traditional savings.
- Paying down variable-rate debt – Variable-rate loans get more expensive as interest rates rise to combat inflation, and paying them off early reduces exposure to higher payments, freeing up future income.
- Cost-of-living adjustments (COLA) – Some pensions, wages or government benefits come with automatic COLAs, which raise payments when inflation surges, and choosing benefits with COLA helps protect real income.
- Budgeting and spending discipline – Rationalizing your budget will help prevent unnecessary spending.
- Investing in Bitcoin – Bitcoin is a proven “hedge against inflation,” and investing in it can counteract the effects of inflation; one Bitcoin will always be one Bitcoin, regardless of what happens to fiat, and as long as the central banks continue to print money, investments in Bitcoin will go on, boosting its value over time, as historically proven so far.
Why is Bitcoin the Best Investment?
Bitcoin is the best investment for multiple reasons, including its resistance to inflation, scarcity, and ongoing rising value.
Consider this: while the US dollar has devalued sharply over time (for instance, $1 in 2010 had the same purchasing power as $1,47 in 2025), Bitcoin’s value has continued to increase. If you measure BTC’s value in US dollars, while 1 BTC was priced at under $1 in 2010, in 2025, it continues to trade above $100,000.
Bitcoin has a fixed supply of 21 million coins, which means that there will never be more Bitcoins in circulation than this number. Scarcity is one of Bitcoin’s key features, which makes it a better investment even when compared to gold. Even if gold is usually seen as a way of storing value, Bitcoin surpasses it due to multiple factors, including scarcity and programmability.
Both Bitcoin and gold can be seen as having monetary value if we think in terms of fiat currencies when measuring their value. However, unlike gold, Bitcoin is a programmable P2P electronic cash system.
Every four years, Bitcoin undergoes an event called halving, which slashes in half the BTC miner rewards. In 2009, the rewards per block were 50 BTC, and in 2012, the rewards were 25 BTC. In 2024, the BTC mining rewards reached 3.125 BTC. This pattern will continue until the maximum supply of 21 million BTC is mined, which is estimated to be around the year 2140.
This also means that fewer Bitcoins enter circulation, as halvings make BTC deflationary – each BTC gains purchasing power instead of losing it.
Bitcoin kills inflation by slowing the creation of new BTCs, enforcing a fixed, declining supply growth rate, due to the way it was programmed by its creator, Satoshi Nakamoto. While fiat currencies lose value over time as central banks continue to print money, Bitcoin becomes scarcer – a long-term hedge against inflation.
Advice for Businesses
Businesses can manage and reduce the impact of high inflation by following these steps:
- Adopting flexible pricing frameworks – Allowing regular price reviews and adjustments as costs change; using value-based pricing or dynamic pricing can protect profit margins
- Implementing cost hedging – Companies can hedge against rising input prices using futures contracts or long-term supply agreements for key commodities, energy, or materials to stabilize costs; effective hedging provides cost predictability, shielding companies from sudden price spikes
- Inventory management – Strategic inventory management and balancing efficiency with protection from supply shocks are the keys to managing inflation risks
- Contracts with indexation – Long-term contracts with inflation indexation clauses can help buyers and suppliers share inflation risks in a fair manner, ensuring that payments automatically adjust with inflation, protecting real revenues and costs.
FAQ on Inflation
What is Inflation?
Inflation is the rising cost of the overall products/services, leading to more effects, including the diminishing purchasing power of fiat money.
How to Calculate the Inflation Rate?
While the US Fed uses multiple economic metrics to calculate inflation, you can also calculate it using this formula: (Price Index this period−Price Index prior period)÷Price Index prior period×100
You can use the official inflation calculator provided by governmental sources to find out the current rate of inflation.
Is Inflation Always Bad for the Economy?
A stable rate of inflation is not always detrimental to a country’s economy or its citizens, as it can counteract the dangers of deflation.
Can Households and Businesses Counteract the Dangers of Inflation?
Households and businesses can counteract the dangers of inflation via multiple means, including smart investments by households and flexible pricing frameworks or strategic inventory management for businesses.
What is the Best Investment to Counteract Inflation?
The best investment that can counteract the effects of inflation is Bitcoin.
