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What is Inflation? Why Prices Go Up

Understand what inflation is, what causes it, how it affects your personal buying power, and how to protect your savings over time.

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Educational content only — not personalized financial, legal, or tax advice.

Inflation is the systemic decline in currency purchasing power, reflected in a sustained increase in the general price level of goods and services across an economy over time. In the United States, inflation is measured primarily by the Consumer Price Index (CPI), calculated monthly by the Bureau of Labor Statistics (BLS) tracking a representative basket of consumer goods and services.

Drivers of Inflation: Demand-Pull and Cost-Push

Inflation occurs through two primary economic mechanisms:

  1. Demand-Pull Inflation: Aggregate demand for goods and services outpaces economic productive capacity. Unprecedented monetary expansion and fiscal stimulus in 2020–2021 pushed U.S. money supply (M2) up by over 26% in a single year, driving U.S. CPI inflation to a 40-year peak of 9.1% in June 2022.
  2. Cost-Push Inflation: Rising production costs—such as spikes in crude oil, raw material shortages, or labor wage increases—force businesses to raise prices. The underlying mechanics of price growth across energy and food sectors are detailed in Inflation Explained.

Uncontrolled inflation reduces real wage growth and erodes household savings, with direct consequences analyzed in inflation's impact on daily life.

Central Bank Countermeasures and Economic Effects

Central banks manage price stability by setting benchmark policy rates. Central bank interest rate levers and balance sheet operations are analyzed in how central banks work. To suppress double-digit inflation, the Central Bank of Brazil aggressively raised benchmark Selic rates from 2.00% in March 2021 to 13.75% by August 2022, as documented in Brazil's central bank inflation war.

High inflation environments reduce real returns on cash deposits, requiring savers to look for high-yield vehicles as detailed in savings account interest rate guide. Sustained price inflation distorts long-term capital investment planning and reduces national real GDP performance. Under normal economic conditions, central banks target a stable 2% annual inflation rate to encourage balanced consumption.