Inflation

What It Means

Inflation is a general rise in the prices of the goods and services people buy, measured over a period such as a year. When prices rise, each dollar buys less, so the same paycheck or savings balance covers fewer things. In the US, the Bureau of Labor Statistics (BLS) tracks prices with the Consumer Price Index (CPI), and the Federal Reserve sets its goal using a second measure, the price index for personal consumption expenditures (PCE).

How It Sounds at Home

• "Everything costs more than it did last year."
• "The same cart is $40 more now."
• "Our raise didn't keep up with inflation."

The Breakdown

Worked example. A household spends $800 a month on groceries today. Here's what the same cart would cost in 1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more years at three steady yearly rates. The rates are made-up examples.

How the rate is worked out. An inflation rate compares a price index at two dates: take the newer index, subtract the older one, divide by the older one and multiply by 100. For example, an index that moves from 300 to 309 over a year shows 3% inflation.

What the result means. Price rises compound the way interestInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more does, so a rate that sounds small adds up over a decade. At 3.4% a year, the $800 month costs about 40% more after 10 years. If your pay and savings grow more slowly than prices, what they can buy shrinks, which is what real incomeReal incomeIncome adjusted for inflation, so it measures what your pay can buy. The dollar amount before that adjustment is called nominal income. See more and purchasing powerPurchasing powerHow much a unit of money, such as one dollar, can buy. When prices rise faster than your money grows, its purchasing power falls. See more measure.

What moves the number. Prices don't all rise at the same speed. In the 12 months through August 2026, BLS reported the energy index up 16.3% and the food index up 2.7%, against 3.4% for all items, so a household that spends a lot on gas and utilities felt more than the headline figure.

Good to Know

The Federal Reserve's longer-run goal is inflation of 2%, measured by the yearly change in the PCE price index, which the Bureau of Economic Analysis (BEA) publishes. According to the Fed, when people can expect inflation to stay low and stable, households and businesses can make sound decisions about saving, borrowing and investing. The CPI is a separate measure with its own numbers, so check which one a headline quotes. To see what a past amount would equal today, BLS offers a free CPI Inflation Calculator on bls.gov.

Related Terms and Categories

• Purchasing power

  How much a unit of money, such as one dollar, can buy. When prices rise faster than your money grows, its purchasing power falls.

• Real income

  Income adjusted for inflation, so it measures what your pay can buy. The dollar amount before that adjustment is called nominal income.

• Cost of living

  What it costs to keep a certain standard of living, such as housing, food and transportation, in a given place at a given time.

• Cost of living adjustment

  An increase in pay or benefits meant to keep up with rising prices, such as Social Security's yearly COLA, which is based on the CPI-W.

• Compound interest

  Interest paid on your original amount and on the interest it has already earned, so each year's interest is a little bigger than the last.

• Lifestyle creep

  When spending rises along with income, so a raise or a new job leads to a bigger lifestyle but little or no extra saving.

Household money and budgeting