Glossary

Inflation

A sustained increase in the general level of prices, reducing the purchasing power of money.

Also called: rising prices, price level increase

Inflation is a general rise in prices across the economy over time, which means each unit of currency buys less. It is typically measured as the annual percentage change in a price index, most often the Consumer Price Index or the Personal Consumption Expenditures (PCE) price index, which the Federal Reserve prefers for its 2 percent target.

Economists identify several causes: demand-pull, when spending outpaces supply; cost-push, from higher costs for inputs like energy; and expectations, when people anticipate rising prices and act in ways that make it happen. Milton Friedman's view, associated with monetarism, held that inflation is "always and everywhere a monetary phenomenon," caused by money growth that exceeds output growth. After 2021, U.S. inflation reached a rate not seen in four decades, and debate continued about the roles of pandemic-era spending, supply disruptions, labor markets and monetary policy.

Central banks counter inflation by raising interest rates through monetary policy. Inflation hits people on fixed incomes and savers and can distort decisions, while moderate inflation is generally regarded as normal. Conservatives often blame federal deficit spending and loose money; others stress supply shocks and corporate pricing. Related ideas include core inflation, stagflation and price-controls.

Last reviewed November 8, 2026

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Related terms

Consumer Price Index The government's main measure of inflation, tracking price changes for a fixed basket of goods and services bought by urban consumers. Core inflation A measure of inflation that excludes volatile food and energy prices to show the underlying trend. Monetary policy The actions of a central bank, such as setting interest rates, to influence money, credit and economic activity. Federal funds rate The interest rate at which banks lend reserve balances to each other overnight, the Federal Reserve's main policy lever. Price controls Government-imposed limits on how high or low the price of a good or service may legally be. Stagflation A combination of slow economic growth, high unemployment and rising prices at the same time.