Inflation is a rise in the average price of goods and services across the whole economy. When it happens, each dollar buys less than it did before. In the United States right now, prices are rising at 3.4% a year — the 12-month rate through August 2026, unchanged from July, according to Labor Department data.
That number is far below the peak. In June 2022, the annual rate hit 9.1%, the highest in this century's records. It has cooled since, but it has not returned to the low, quiet levels of the 2010s, when annual inflation usually ran between roughly 1% and 3%.
This explainer covers what inflation actually is, how it gets measured, and what pushed it up in the first place. For readers who want the measurement details, our separate piece on how the CPI is actually measured goes deeper. Here, the focus is on the idea itself.
What is inflation, exactly?
Inflation is an increase in the average price of goods and services in terms of money. The key word is average. If cucumbers get pricier because shoppers suddenly want more of them, while tomatoes get cheaper, that is a shift in tastes — not inflation. Inflation is about the general trend of prices, and it reflects the value of the currency itself.
As Wikipedia's overview of inflation puts it, when the general price level rises, each unit of currency buys fewer goods and services. The opposite is deflation, a fall in the general price level. Economists also track related terms: disinflation means inflation is still rising but more slowly; stagflation combines inflation with slow growth and high unemployment.
The word has a curious history. It originally referred to an increase in the money supply, not to rising prices. During the American Civil War, when banks printed more banknotes than the metal backing them, "inflation" came to mean currency losing value. The modern price-level meaning took over later.
How is inflation measured?
The standard yardstick is a price index, most often the Consumer Price Index, or CPI. The Bureau of Labor Statistics publishes it monthly. The inflation rate you see in headlines is the percentage change in that index over 12 months.
The arithmetic is simple. Take the CPI for one month, subtract the CPI for the same month a year earlier, divide by the earlier figure, and multiply by 100. As an example, the difference between January 2016 and January 2017 CPI values worked out to an annual rate of 2.5%.
The US Inflation Calculator site's running table of annual inflation rates, built from BLS data, shows how the numbers moved through the recent episode: 7.0% for calendar 2021, 8.0% on average for 2022, 4.1% for 2023, 2.9% for 2024, and 2.7% for 2025. The 2026 monthly readings have ranged from 2.4% in January and February to 4.2% in May, settling at 3.4% for the 12 months ending August.
One wrinkle worth knowing: the monthly change and the annual change are different animals. The monthly rate is seasonally adjusted; the annual rate usually is not. And headline figures get revised and re-benchmarked, which our coverage of why economic data keeps getting revised explains in detail. For related coverage, see Why economic data keeps getting revised after release.
Why did prices surge after 2021?
Economists group the causes of inflation into a few broad buckets. Changes are widely attributed to growth in the money supply, shifts in real demand for goods and services, drops in available supply such as during energy crises, big cuts in central bank interest rates, or changes in what people expect inflation to be. Those expectations can be self-fulfilling: if firms and workers believe prices will rise, they raise prices and wages to match.
The 2021–2023 surge had features of more than one bucket. Demand shifted hard toward goods while supply chains were strained. Energy prices spiked. Money supply and fiscal support expanded sharply. None of these forces alone explains the whole move, and economists still debate the weights.
What the record shows is the shape of it. Annual inflation climbed steadily through 2021, peaked at 9.1% in June 2022, and then declined in steps through 2023 and 2024. The recent 2026 readings — 3.8% in April, 4.2% in May, then 3.5%, 3.4%, 3.4% — suggest a bumpy plateau rather than a straight line back to 2%.
Who feels inflation, and how?
Inflation is not spread evenly. It lands hardest on things people cannot skip. The Bureau of Labor Statistics' own CPI features make this concrete: in an Economics Daily note on school lunch prices, the agency reports that over the past 20 years, white bread rose 87.5%, lunchmeats 58.3%, and lettuce 52.0%. Groceries sit in every household budget, so those increases compound quietly.
Wages are the other side of the ledger. Moderate inflation has real costs: workers are pushed into risky wage negotiations as their purchasing power erodes between contracts, uncertainty about future inflation can discourage saving and investment, and if inflation runs fast enough, consumers may hoard goods. There are upsides too — a little inflation can reduce unemployment when wages are slow to adjust, and it gives central banks room to work. Most economists today favor a low and steady rate, not zero.
Keeping the rate low and stable is usually the job of central banks, which act through interest rates and open market operations. That is why inflation prints move rate expectations — our piece on how Fed rate probabilities are priced and read covers that connection. We covered a connected angle in How are Fed rate probabilities priced and read?.
What this means for readers
Practical takeaway one: always check the window. "Inflation is 3.4%" means the 12 months ending August 2026, not a forecast of next year. Rates are backward-looking by construction.
Practical takeaway two: your personal inflation rate differs from the headline. The index is an average basket for urban consumers. If you spend heavily on categories rising faster than average, your effective rate is higher, and vice versa.
Practical takeaway three: distinguish the level from the rate. A 3.4% inflation rate means prices are still climbing — just more slowly than in 2022. Disinflation is not the same as falling prices. Confusing the two is one of the most common reading errors in economic news.
The limits of what the number can tell you
The headline CPI rate cannot tell you why prices rose, whose basket got more expensive, or whether the trend will hold. It is one averaged index, not seasonally adjusted in its headline annual form, and it says nothing about asset prices, which can inflate separately from goods and services. Economists also track narrower measures — energy inflation, house price inflation, food price spikes — because the average can mask them.
What the evidence here establishes is the definition, the measurement method, and the recent record. What remains genuinely uncertain is the forward path: the sources describe the forces that drive inflation, but the mix of those forces at any moment is a matter of ongoing debate among economists, not settled fact.
