Inflation
A general rise in the price level, produced in the sustained case by money growing faster than output — which lowers what a unit of currency will buy.
Inflation is a rise in prices generally, not a rise in the price of any one thing. Rent going up is not inflation. Rent, groceries, insurance, haircuts and airfares all going up together is.
Sustained inflation — the kind that shows up in the twelve-month Consumer Price Index year after year — is a monetary phenomenon. It is produced by the quantity of money growing faster than the goods and services that money buys. A harvest failure, a shipping disruption or a tariff can lift some prices, and the headline, once. They do not print the extra money. The explainer is the long form of that claim.
It is measured by tracking what a fixed basket of goods and services costs from one period to the next, and it is almost always quoted as a percentage change over twelve months.
The most common misreading is to treat falling inflation as falling prices. It is not. If inflation drops from 6 percent to 3 percent, prices are still rising — just at half the previous pace. Prices actually falling is deflation.
Nor is the Federal Reserve’s goal zero. It aims for 2 percent a year over the longer run, on the PCE index. That is a Committee choice, stated publicly in 2012, not a number Congress wrote. At 2 percent the price level roughly doubles over a working lifetime. Households on fixed incomes, retirees, and anyone holding cash or a bond that does not reprice pay that path. “Room to cut in a downturn” is the usual justification. It is still a decision to inflate the currency, not a law of nature. Stable prices are half of the Fed’s dual mandate; maximum employment is the other half. The mandate does not repeal the arithmetic.
A worked example
A basket of goods cost $100 a year ago and costs $103 today. Inflation over the year is 3 percent. If next year it costs $105, inflation has slowed to about 1.9 percent — and the basket is still $5 dearer than it was, not cheaper. For prices to fall, the basket would have to cost less than $105 the year after; that would be deflation.
Compounding is the part intuition misses. At 2 percent a year, the basket costs about $122 after ten years and roughly doubles after thirty-five. At 4 percent, it doubles in about eighteen.
How to read it in coverage
“Inflation fell” means prices rose more slowly — a distinction that decides whether a headline is good news or merely less bad news. “Inflation at 3 percent” is nearly always the twelve-month CPI change; check whether it is headline or core, and whether the month-on-month figure tells a different story. The Fed’s target is 2 percent on the PCE index, not CPI, so a CPI reading slightly above 2 can be consistent with the target being met. “Caused by X” — if X is not money, ask whether money accommodated it, and whether the rise is still going after X has passed.
Quoted as a percentage over twelve months. Half of monetary policy is written against it. The Federal Reserve's 2 percent target is a choice, not zero, and not a figure in the statute.