What Is Inflation?
Inflation is the rate at which prices rise across the economy, so that each dollar buys less. How it's measured, what it does to savings and investments, and what the Federal Reserve aims for.
In one sentence
Inflation. A general rise in prices over time. When prices rise, the same amount of money buys less.
How it works
When prices rise across the economy, the same money buys less. Inflation is usually measured as the change in a price index over 12 months. In the US, consumer prices rose 3.4% over the 12 months to August 2026, or 2.4% excluding food and energy.1
| Years | Buying power, in today's dollars |
|---|---|
| 0 | $10,000 |
| 10 | About $7,440 |
| 20 | About $5,540 |
| 30 | About $4,120 |
The balance never changes, but after 30 years it buys less than half as much. That's why returns are judged after inflation: the "real" return.
What the Fed aims for
The Federal Reserve judges that inflation of 2% over the longer run, measured by the annual change in the price index for personal consumption expenditures, is most consistent with its mandate for maximum employment and price stability.2 When inflation runs above that, it tends to raise interest rates, which affects bonds, mortgages, and share prices.
Learn it properly
- What Is Investing?Part 1: Foundations · Free
- Inflation and Purchasing PowerPart 1: Foundations · Free
- Growth, Inflation, and Interest RatesPart 6: Strategy, Behavior, Accounts, and Taxes · Free
Notes and sources
- U.S. Bureau of Labor Statistics. Consumer Price Index, August 2026 (released September 11, 2026). Checked 2026-10-14. Back to text
- Board of Governors of the Federal Reserve System. Why does the Federal Reserve aim for inflation of 2 percent over the longer run?. Checked 2026-10-14. Back to text