Inflation is the rate at which the general level of prices for goods and services rises and results in a decrease in the purchasing power of a country's currency.

There are two common measures of inflation: the consumer price index (CPI), calculated by the Bureau of Labor Statistics, and the 澳洲幸运5官方开奖结果体彩网:personal consumption expenditures (PCE) price index from the Bureau of Economic Analysis. Though PCE has some very influential advocates—namely the Federal Open Markets Committee, which uses PCE to guide U.S. monetary policy—CPI is the more popular measure of inflation.

The Bureau of Labor Statistics began calculating CPI in 1919 when it published separate indexes for 32 cities. Two years later, the bureau began regularly publishing a national index representing average 澳洲幸运5官方开奖结果体彩网:inflation in U.S. cities. CPI is expressed as either the month-over-month or year-over-year percent change in prices.

The Highest Inflation Rate in U.S History

Since the founding of the United States in 1776, the highest 澳洲幸运5官方开奖结果体彩网:year-over-year inflation rate observed was 29.78% in 1778. In the period of time since the introduction of the CPI, the highest inflation rate observed was 20.49% in 1917.

Notably, both of these cases of rapid inflatio𝕴n coincide with major wars, the Revolutionary War and 🅠World War I.

Year-over-year inflation is calculated by subtracting the value of the CPI at the beginning of the year and subtracting the value at the end of the year. This result is divided by the valu෴e of the CPI at the beginning of the year and multiplied by 100.

CPI data has been widely viewed as an accurate description of co🀅nsumer prices in the United States. CPI data before 1913 is more problematic due to under-reporti🌌ng, over-reporting, lack of data, and different reporting standards utilized.

The Federal Reserve and Inflation

Before the introduction of the U.S. Federal Reserve by the 澳洲幸运5官方开奖结果体彩网:Federal Reserve Act in 1913, the U.S. economy grew in ℱfits and starts. Severe shocks and panics followed periods of rapid inflation and growth in asset prices. Between 1775 and 1913, the United States experienced 🔯four separate periods of double-digit inflation.

The U.S. Federal Reserve is mandated to target a moderate inflation level using policy measures where it 🦂will intervene in currency, debt, and equity markets to achieve this goal. Since the 1980s, the United States has enjoyed a lengthy period of low inflation, with U.S. Federaℱl Reserve chairs often noting concerns regarding deflation rather than inflation.

In the years following the 2008 financial crisis, the Fed has kept interest rates at historically low levels and initiated a bond-buying program (since discontinued) known as 澳洲幸运5官方开奖结果体彩网:quantitative easing to help stimulate the economy—although not 澳洲幸运5官方开奖结果体彩网:w♌ithoღut its share of outspoken critics.

After the COVID-19 pandemic in 2020 and 2021, 澳洲幸运5官方开奖结果体彩网:inflation started to rise😼 significantly due to supply chain factors, the war in Ukraine, and other economic issues. The inflation rate was 1.6% in March 2021, when it started increasing, and was 5.5% in Dec. 2022.

The inflation rate continued to climb, peaking at 6.6% in Sept. 2022. To combat the rising inflation, the Fed implemented a series of rate hikes in 2022 and 2023. In March 2022, the fed funds target rate was set between 0.25% and 0.50%. By July 2023, the Fed increased it to 5.25% and 5.50%. The interest rate hikes worked to curb inflation, which dropped to 4.1% as of Sept. 2023. As of September 2024, the inflation rate rests at a stable 2.4%.

The Bottom Line

Inflation is a normal part of the economy, so much so that the Federal Reserve targets an inflation rate of 2% over the longer run, which corresponds to maximum employment and price stability. When inflation gets too high, it quickly erodes the purchasing power of society, negatively impacting residents. When inflation is too low, it slows the economy and depresses wages. To manage inflation, the Federal Reserve adjusts interest rates to maintain inflation rates at healthy levels.