What is Inflation?
Inflation is the general increase in prices over time, which causes the purchasing power of money to decrease. A 3% annual inflation rate means that a basket of goods costing $100 today will cost $103 next year. Over 24 years, prices would roughly double.
How Inflation is Measured
The most common measure of inflation is the Consumer Price Index (CPI), which tracks the average price change of a basket of goods and services typically purchased by households, including food, housing, transportation, and healthcare.
US Historical Inflation Rates
| Period | Avg. Annual Inflation | Notable Events |
|---|---|---|
| 1970s | ~7.4% | Oil crisis, stagflation |
| 1980s | ~5.1% | Fed tightening, disinflation |
| 1990s | ~3.0% | Stable growth decade |
| 2000s | ~2.6% | Housing bubble, 2008 crisis |
| 2010s | ~1.8% | Low inflation era |
| 2020–2022 | ~5.5% | COVID-19 supply chain shock |
| 2023–2024 | ~3.2% | Fed rate hikes, disinflation |
How to Beat Inflation
- Invest in equities: Stocks have historically returned ~7% real (after inflation) annually
- Real estate: Property values and rents tend to rise with inflation
- TIPS: Treasury Inflation-Protected Securities adjust with CPI
- I-Bonds: US savings bonds with interest tied to inflation rate
- Avoid cash hoarding: Money in low-yield savings accounts loses purchasing power