What Is Inflation?
Inflation is the sustained increase in the general price level of goods and services over time. As prices rise, each dollar buys less than it did before — this is called a reduction in purchasing power. Inflation is measured using the Consumer Price Index (CPI), which tracks the average cost of a basket of common goods and services.
The US Federal Reserve targets a 2% annual inflation rate as a sign of a healthy, growing economy. When inflation runs too high, it erodes savings and purchasing power. When it runs too low (or turns negative, called deflation), it can stifle economic growth.
Inflation Formula
Historical US Inflation Rates
| Decade | Avg Annual CPI Inflation |
|---|---|
| 1970s | 7.4% (oil crisis era) |
| 1980s | 5.6% |
| 1990s | 3.0% |
| 2000s | 2.6% |
| 2010s | 1.8% |
| 2020–2022 | 5.2% (post-pandemic surge) |
| 2023–2024 | ~3.1% |
Inflation and Your Savings
If your savings account earns less interest than the inflation rate, your money is effectively losing value each year in real terms. For example, $50,000 sitting in a 1% savings account during a year with 4% inflation loses about $1,500 in purchasing power. This is why investing in assets that outpace inflation — stocks, real estate, TIPS — is essential for long-term wealth preservation.