What is inflation?
In one line: Inflation is the general rise in prices over time. When inflation is 3%, something that cost $100 a year ago costs about $103 today.
A simple example with numbers
A basket of everyday things, like groceries, rent and fuel, cost $100 last year. This year the same basket costs $103. Inflation was (103 − 100) ÷ 100 = 3%.
Now look further ahead. If prices rise 3% a year for 10 years, $1,000 buys only what about $744 buys today. (1,000 ÷ 1.03¹⁰ ≈ 744.) Try your own numbers in the inflation calculator.
How it's measured in the US
- CPI (Consumer Price Index): from the Bureau of Labor Statistics, released monthly at 8:30 am ET. It's the headline number most people hear. See CPI and the CPI report guide.
- PCE (Personal Consumption Expenditures): from the Bureau of Economic Analysis. It's the measure the Federal Reserve's 2% inflation goal is based on. See the PCE guide.
- Core versions of both leave out food and energy, which jump around a lot.
Why traders watch it
Inflation drives interest rates. When inflation runs above the goal, a Central bank tends to keep rates higher or raise them. When it cools, cuts become more likely.
- Hotter than expected: yields often rise, the dollar often strengthens, stocks can drop.
- Cooler than expected: often the reverse.
That's why CPI mornings can move every market within seconds. Our guide on CPI and FOMC days covers what to check before you trade on them.
A common mistake
Reacting to the number without the forecast. Markets move on the surprise. If everyone expected 3.1% and it came in at 3.1%, price may barely care. Compare actual vs forecast on an economic calendar before you read anything into the move.
Many traders stay out for the first 15–30 minutes after a big inflation report, when spreads widen and price whips both ways.
Questions
Is some inflation normal?
Yes. Most central banks aim for low, steady inflation, around 2% a year, rather than zero.
What is deflation?
The opposite of inflation: prices falling across the economy. It sounds nice, but it can make people delay spending and slow the economy.
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