What Is Inflation? How It Is Calculated and Why It Matters
Inflation is the rate at which prices rise over time, eroding the purchasing power of money. Understanding how it is measured and how it compounds helps explain why a salary that felt generous 10 years ago may feel tight today — and why using an inflation calculator is essential for making meaningful historical price comparisons.
What Is Inflation?
Inflation is a general increase in the price level of goods and services in an economy over time. When inflation occurs, each unit of currency buys fewer goods and services — this is called a decline in purchasing power. The opposite, deflation, occurs when prices fall broadly, which is rare but has its own economic consequences.
Mild inflation (1–3% annually) is considered normal and even desirable in a healthy economy — it encourages spending and investment rather than hoarding cash. High or unpredictable inflation (above 5–10%) is disruptive: it erodes savings, distorts investment decisions, and makes long-term planning difficult.
How the CPI Measures Inflation
The US Bureau of Labor Statistics (BLS) measures inflation through the Consumer Price Index (CPI-U), which tracks the average price change of a fixed basket of goods and services purchased by urban consumers. The basket includes:
- Housing (shelter, utilities) — the largest component at ~33%
- Food and beverages — ~15%
- Transportation (vehicles, fuel) — ~15%
- Medical care — ~9%
- Education and communication — ~7%
- Recreation, apparel, and other items — ~21%
The BLS collects prices for around 80,000 items monthly from 23,000 retail establishments and 50,000 housing units. The index is published monthly with an annual average used for year-over-year comparisons.
How to Calculate Inflation Between Two Years
The formula to adjust a price from Year A to Year B using CPI:
Adjusted price = Original price × (CPI_B ÷ CPI_A)
Example: What was $100 in 1990 worth in 2025? CPI_1990 = 130.7, CPI_2025 = 318.0. Adjusted = $100 × (318.0 ÷ 130.7) = $243.30.
The inflation calculator applies this formula automatically using US CPI annual averages from 1960 through 2025.
US Inflation by Decade
| Decade | Notable events | Avg annual CPI change | $100 at start → end |
|---|---|---|---|
| 1960s | Vietnam War spending, rising demand | ~2.5% | $100 → $128 |
| 1970s | Oil crisis, stagflation | ~7.4% | $100 → $205 |
| 1980s | Volcker rate hikes, disinflation | ~5.6% | $100 → $169 |
| 1990s | Tech boom, low commodity prices | ~3.0% | $100 → $134 |
| 2000s | Housing boom, financial crisis | ~2.6% | $100 → $129 |
| 2010s | Quantitative easing, low oil | ~1.8% | $100 → $118 |
| 2020–2025 | COVID stimulus, supply chain disruptions | ~5.2% | $100 → $123 |
What Causes Inflation?
Demand-pull inflation
When demand for goods and services outstrips supply — often due to government stimulus, low interest rates, or rising employment — sellers can charge higher prices. This was a major driver of US inflation in 2021–2022 following pandemic stimulus payments.
Cost-push inflation
When the cost of production rises (higher wages, raw material prices, or energy costs), businesses pass those costs to consumers. The 1970s oil shocks are a classic example — a quadrupling of oil prices raised costs across every sector of the economy.
Monetary inflation
When the money supply grows faster than economic output, each unit of money buys less. Central banks manage this through interest rate policy — raising rates reduces borrowing and spending, slowing price growth.
How Inflation Affects Savings and Investments
Cash sitting in a low-yield account loses real value when inflation exceeds the interest rate. If inflation is 4% and your savings account pays 1%, your purchasing power falls by 3% annually. Over 20 years, $100,000 in that account would buy only about $55,000 worth of goods at today's prices.
Assets that historically outpace inflation include equities (stocks), real estate, and inflation-protected securities (TIPS). Use the inflation calculator to benchmark any investment's nominal return against the real purchasing-power gain after adjusting for CPI.
Adjust Any Dollar Amount for Inflation
US CPI data 1960–2025. Cumulative inflation, annual rate, purchasing power change. Free, no signup.
Open Inflation Calculator