Inflation Calculator
Forward Flat Rate Inflation Calculator
Backward Flat Rate Inflation Calculator
What is Inflation Calculator?
The Inflation Calculator uses historical Consumer Price Index (CPI) data from the United States to calculate the buying power of the dollar in various years. Simply enter an amount and the relevant year, followed by the inflation-adjusted amount.
There is also a Forward Flat Rate Inflation Calculator and a Backward Flat Rate Inflation Calculator that can be used in theoretical scenarios to calculate inflation-adjusted amounts given an amount adjusted for the number of years and inflation rate. Historically, inflation rates in the United States and many other industrialised countries have hovered around 3%, making this a safe assumption. However, feel free to make adjustments as needed.
Historical Inflation Rate for the U.S.
The Bureau of Labour Statistics in the United States releases the Consumer Price Index (CPI) every month, which can be used to calculate the inflation rate. The following is a list of historical inflation rates for the United States (in US dollars) since 2013.
Year | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | Average |
2025 | 3.00% | 2.82% | 2.39% | 2.31% | 2.35% | 2.67% | 2.70% | 2.92% | |||||
2024 | 3.09% | 3.15% | 3.48% | 3.36% | 3.27% | 2.97% | 2.89% | 2.53% | 2.44% | 2.60% | 2.75% | 2.89% | 2.95% |
2023 | 6.41% | 6.04% | 4.98% | 4.93% | 4.05% | 2.97% | 3.18% | 3.67% | 3.70% | 3.24% | 3.14% | 3.35% | 4.12% |
2022 | 7.48% | 7.87% | 8.54% | 8.26% | 8.58% | 9.06% | 8.52% | 8.26% | 8.20% | 7.75% | 7.11% | 6.45% | 8.00% |
2021 | 1.40% | 1.68% | 2.62% | 4.16% | 4.99% | 5.39% | 5.37% | 5.25% | 5.39% | 6.22% | 6.81% | 7.04% | 4.70% |
2020 | 2.49% | 2.33% | 1.54% | 0.33% | 0.12% | 0.65% | 0.99% | 1.31% | 1.37% | 1.18% | 1.17% | 1.36% | 1.24% |
2019 | 1.55% | 1.52% | 1.86% | 2.00% | 1.79% | 1.65% | 1.81% | 1.75% | 1.71% | 1.76% | 2.05% | 2.29% | 1.81% |
2018 | 2.07% | 2.21% | 2.36% | 2.46% | 2.80% | 2.87% | 2.95% | 2.70% | 2.28% | 2.52% | 2.18% | 1.91% | 2.44% |
2017 | 2.50% | 2.74% | 2.38% | 2.20% | 1.87% | 1.63% | 1.73% | 1.94% | 2.23% | 2.04% | 2.20% | 2.11% | 2.13% |
2016 | 1.37% | 1.02% | 0.85% | 1.13% | 1.02% | 1.01% | 0.84% | 1.06% | 1.46% | 1.64% | 1.69% | 2.07% | 1.26% |
2015 | -0.09% | -0.03% | -0.07% | -0.20% | -0.04% | 0.12% | 0.17% | 0.20% | -0.04% | 0.17% | 0.50% | 0.73% | 0.12% |
2014 | 1.58% | 1.13% | 1.51% | 1.95% | 2.13% | 2.07% | 1.99% | 1.70% | 1.66% | 1.66% | 1.32% | 0.76% | 1.62% |
2013 | 1.59% | 1.98% | 1.47% | 1.06% | 1.36% | 1.75% | 1.96% | 1.52% | 1.18% | 0.96% | 1.24% | 1.50% | 1.47% |
2012 | 2.93% | 2.87% | 2.65% | 2.30% | 1.70% | 1.66% | 1.41% | 1.69% | 1.99% | 2.16% | 1.76% | 1.74% | 2.07% |
2011 | 1.63% | 2.11% | 2.68% | 3.16% | 3.57% | 3.56% | 3.63% | 3.77% | 3.87% | 3.53% | 3.39% | 2.96% | 3.16% |
2010 | 2.63% | 2.14% | 2.31% | 2.24% | 2.02% | 1.05% | 1.24% | 1.15% | 1.14% | 1.17% | 1.14% | 1.50% | 1.64% |
2009 | 0.03% | 0.24% | -0.38% | -0.74% | -1.28% | -1.43% | -2.10% | -1.48% | -1.29% | -0.18% | 1.84% | 2.72% | -0.34% |
2008 | 4.28% | 4.03% | 3.98% | 3.94% | 4.18% | 5.02% | 5.60% | 5.37% | 4.94% | 3.66% | 1.07% | 0.09% | 3.85% |
2007 | 2.08% | 2.42% | 2.78% | 2.57% | 2.69% | 2.69% | 2.36% | 1.97% | 2.76% | 3.54% | 4.31% | 4.08% | 2.85% |
2006 | 3.99% | 3.60% | 3.36% | 3.55% | 4.17% | 4.32% | 4.15% | 3.82% | 2.06% | 1.31% | 1.97% | 2.54% | 3.24% |
2005 | 2.97% | 3.01% | 3.15% | 3.51% | 2.80% | 2.53% | 3.17% | 3.64% | 4.69% | 4.35% | 3.46% | 3.42% | 3.39% |
2004 | 1.93% | 1.69% | 1.74% | 2.29% | 3.05% | 3.27% | 2.99% | 2.65% | 2.54% | 3.19% | 3.52% | 3.26% | 2.68% |
2003 | 2.60% | 2.98% | 3.02% | 2.22% | 2.06% | 2.11% | 2.11% | 2.16% | 2.32% | 2.04% | 1.77% | 1.88% | 2.27% |
2002 | 1.14% | 1.14% | 1.48% | 1.64% | 1.18% | 1.07% | 1.46% | 1.80% | 1.51% | 2.03% | 2.20% | 2.38% | 1.59% |
2001 | 3.73% | 3.53% | 2.92% | 3.27% | 3.62% | 3.25% | 2.72% | 2.72% | 2.65% | 2.13% | 1.90% | 1.55% | 2.83% |
2000 | 2.74% | 3.22% | 3.76% | 3.07% | 3.19% | 3.73% | 3.66% | 3.41% | 3.45% | 3.45% | 3.45% | 3.39% | 3.38% |
1999 | 1.67% | 1.61% | 1.73% | 2.28% | 2.09% | 1.96% | 2.14% | 2.26% | 2.63% | 2.56% | 2.62% | 2.68% | 2.19% |
1998 | 1.57% | 1.44% | 1.37% | 1.44% | 1.69% | 1.68% | 1.68% | 1.62% | 1.49% | 1.49% | 1.55% | 1.61% | 1.55% |
1997 | 3.04% | 3.03% | 2.76% | 2.50% | 2.23% | 2.30% | 2.23% | 2.23% | 2.15% | 2.08% | 1.83% | 1.70% | 2.34% |
1996 | 2.73% | 2.65% | 2.84% | 2.90% | 2.89% | 2.75% | 2.95% | 2.88% | 3.00% | 2.99% | 3.26% | 3.32% | 2.93% |
1995 | 2.80% | 2.86% | 2.85% | 3.05% | 3.19% | 3.04% | 2.76% | 2.62% | 2.54% | 2.81% | 2.61% | 2.54% | 2.81% |
1994 | 2.52% | 2.52% | 2.51% | 2.36% | 2.29% | 2.49% | 2.77% | 2.90% | 2.96% | 2.61% | 2.67% | 2.67% | 2.61% |
1993 | 3.26% | 3.25% | 3.09% | 3.23% | 3.22% | 3.00% | 2.78% | 2.77% | 2.69% | 2.75% | 2.68% | 2.75% | 2.96% |
1992 | 2.60% | 2.82% | 3.19% | 3.18% | 3.02% | 3.09% | 3.16% | 3.15% | 2.99% | 3.20% | 3.05% | 2.90% | 3.03% |
1991 | 5.65% | 5.31% | 4.90% | 4.89% | 4.95% | 4.70% | 4.45% | 3.80% | 3.39% | 2.92% | 2.99% | 3.06% | 4.25% |
1990 | 5.20% | 5.26% | 5.23% | 4.71% | 4.36% | 4.67% | 4.82% | 5.62% | 6.16% | 6.29% | 6.27% | 6.11% | 5.39% |
1989 | 4.67% | 4.83% | 4.98% | 5.12% | 5.36% | 5.17% | 4.98% | 4.71% | 4.34% | 4.49% | 4.66% | 4.65% | 4.83% |
1988 | 4.05% | 3.94% | 3.93% | 3.90% | 3.89% | 3.96% | 4.13% | 4.02% | 4.17% | 4.25% | 4.25% | 4.42% | 4.08% |
1987 | 1.46% | 2.10% | 3.03% | 3.78% | 3.86% | 3.65% | 3.93% | 4.28% | 4.36% | 4.53% | 4.53% | 4.43% | 3.66% |
1986 | 3.89% | 3.11% | 2.26% | 1.59% | 1.49% | 1.77% | 1.58% | 1.57% | 1.75% | 1.47% | 1.28% | 1.10% | 1.91% |
1985 | 3.53% | 3.52% | 3.70% | 3.69% | 3.77% | 3.76% | 3.55% | 3.35% | 3.14% | 3.23% | 3.51% | 3.80% | 3.55% |
1984 | 4.19% | 4.60% | 4.80% | 4.56% | 4.23% | 4.22% | 4.20% | 4.29% | 4.27% | 4.26% | 4.05% | 3.95% | 4.30% |
1983 | 3.71% | 3.49% | 3.60% | 3.90% | 3.55% | 2.58% | 2.46% | 2.56% | 2.86% | 2.85% | 3.27% | 3.79% | 3.22% |
1982 | 8.39% | 7.62% | 6.78% | 6.51% | 6.68% | 7.06% | 6.44% | 5.85% | 5.04% | 5.14% | 4.59% | 3.83% | 6.16% |
1981 | 11.83% | 11.41% | 10.49% | 10.00% | 9.78% | 9.55% | 10.76% | 10.80% | 10.95% | 10.14% | 9.59% | 8.92% | 10.35% |
1980 | 13.91% | 14.18% | 14.76% | 14.73% | 14.41% | 14.38% | 13.13% | 12.87% | 12.60% | 12.77% | 12.65% | 12.52% | 13.58% |
1979 | 9.28% | 9.86% | 10.09% | 10.49% | 10.85% | 10.89% | 11.26% | 11.82% | 12.18% | 12.07% | 12.61% | 13.29% | 11.22% |
1978 | 6.84% | 6.43% | 6.55% | 6.50% | 6.97% | 7.41% | 7.70% | 7.84% | 8.31% | 8.93% | 8.89% | 9.02% | 7.62% |
1977 | 5.22% | 5.91% | 6.44% | 6.95% | 6.73% | 6.87% | 6.83% | 6.62% | 6.60% | 6.39% | 6.72% | 6.70% | 6.50% |
1976 | 6.72% | 6.29% | 6.07% | 6.05% | 6.20% | 5.97% | 5.35% | 5.71% | 5.49% | 5.46% | 4.88% | 4.86% | 5.75% |
1975 | 11.80% | 11.23% | 10.25% | 10.21% | 9.47% | 9.39% | 9.72% | 8.60% | 7.91% | 7.44% | 7.38% | 6.94% | 9.20% |
1974 | 9.39% | 10.02% | 10.39% | 10.09% | 10.71% | 10.86% | 11.51% | 10.86% | 11.95% | 12.06% | 12.20% | 12.34% | 11.03% |
1973 | 3.65% | 3.87% | 4.59% | 5.06% | 5.53% | 6.00% | 5.73% | 7.38% | 7.36% | 7.80% | 8.25% | 8.71% | 6.16% |
1972 | 3.27% | 3.51% | 3.50% | 3.49% | 3.23% | 2.71% | 2.95% | 2.94% | 3.19% | 3.42% | 3.67% | 3.41% | 3.27% |
1971 | 5.29% | 5.00% | 4.71% | 4.16% | 4.40% | 4.64% | 4.36% | 4.62% | 4.08% | 3.81% | 3.28% | 3.27% | 4.30% |
1970 | 6.18% | 6.15% | 5.82% | 6.06% | 6.04% | 6.01% | 5.98% | 5.41% | 5.66% | 5.63% | 5.60% | 5.57% | 5.84% |
1969 | 4.40% | 4.68% | 5.25% | 5.52% | 5.51% | 5.48% | 5.44% | 5.71% | 5.70% | 5.67% | 5.93% | 6.20% | 5.46% |
1968 | 3.65% | 3.95% | 3.94% | 3.93% | 3.92% | 4.20% | 4.49% | 4.48% | 4.46% | 4.75% | 4.73% | 4.72% | 4.27% |
1967 | 3.46% | 2.81% | 2.80% | 2.48% | 2.79% | 2.78% | 2.77% | 2.45% | 2.75% | 2.43% | 2.74% | 3.04% | 2.78% |
1966 | 1.92% | 2.56% | 2.56% | 2.87% | 2.87% | 2.53% | 2.85% | 3.48% | 3.48% | 3.79% | 3.79% | 3.46% | 3.01% |
1965 | 0.97% | 0.97% | 1.29% | 1.62% | 1.62% | 1.94% | 1.61% | 1.94% | 1.61% | 1.93% | 1.60% | 1.92% | 1.59% |
1964 | 1.64% | 1.64% | 1.31% | 1.31% | 1.31% | 1.31% | 1.30% | 0.98% | 1.30% | 0.97% | 1.30% | 0.97% | 1.28% |
1963 | 1.33% | 1.00% | 1.33% | 0.99% | 0.99% | 1.32% | 1.32% | 1.32% | 0.99% | 1.32% | 1.32% | 1.64% | 1.24% |
1962 | 0.67% | 1.01% | 1.01% | 1.34% | 1.34% | 1.34% | 1.00% | 1.34% | 1.33% | 1.33% | 1.33% | 1.33% | 1.20% |
1961 | 1.71% | 1.36% | 1.36% | 1.02% | 1.02% | 0.68% | 1.35% | 1.01% | 1.35% | 0.67% | 0.67% | 0.67% | 1.07% |
1960 | 1.03% | 1.73% | 1.73% | 1.72% | 1.72% | 1.72% | 1.37% | 1.37% | 1.02% | 1.36% | 1.36% | 1.36% | 1.46% |
1959 | 1.40% | 1.05% | 0.35% | 0.35% | 0.35% | 0.69% | 0.69% | 1.04% | 1.38% | 1.73% | 1.38% | 1.73% | 1.01% |
1958 | 3.62% | 3.25% | 3.60% | 3.58% | 3.21% | 2.85% | 2.47% | 2.12% | 2.12% | 2.12% | 2.11% | 1.76% | 2.73% |
1957 | 2.99% | 3.36% | 3.73% | 3.72% | 3.70% | 3.31% | 3.28% | 3.66% | 3.28% | 2.91% | 3.27% | 2.90% | 3.34% |
1956 | 0.37% | 0.37% | 0.37% | 0.75% | 1.12% | 1.87% | 2.24% | 1.87% | 1.86% | 2.23% | 2.23% | 2.99% | 1.52% |
1955 | -0.74% | -0.74% | -0.74% | -0.37% | -0.74% | -0.74% | -0.37% | -0.37% | 0.37% | 0.37% | 0.37% | 0.37% | -0.28% |
1954 | 1.13% | 1.51% | 1.13% | 0.75% | 0.75% | 0.37% | 0.37% | 0.00% | -0.37% | -0.74% | -0.37% | -0.74% | 0.32% |
1953 | 0.38% | 0.76% | 1.14% | 0.76% | 1.14% | 1.13% | 0.37% | 0.75% | 0.75% | 1.12% | 0.75% | 0.75% | 0.82% |
1952 | 4.33% | 2.33% | 1.94% | 2.33% | 1.93% | 2.32% | 3.09% | 3.09% | 2.30% | 1.91% | 1.14% | 0.75% | 2.29% |
1951 | 8.09% | 9.36% | 9.32% | 9.32% | 9.28% | 8.82% | 7.47% | 6.58% | 6.97% | 6.50% | 6.88% | 6.00% | 7.88% |
1950 | -2.08% | -1.26% | -0.84% | -1.26% | -0.42% | -0.42% | 1.69% | 2.10% | 2.09% | 3.80% | 3.78% | 5.93% | 1.09% |
1949 | 1.27% | 1.28% | 1.71% | 0.42% | -0.42% | -0.83% | -2.87% | -2.86% | -2.45% | -2.87% | -1.65% | -2.07% | -0.95% |
1948 | 10.23% | 9.30% | 6.85% | 8.68% | 9.13% | 9.55% | 9.91% | 8.89% | 6.52% | 6.09% | 4.76% | 2.99% | 7.74% |
1947 | 18.13% | 18.78% | 19.67% | 19.02% | 18.38% | 17.65% | 12.12% | 11.39% | 12.75% | 10.58% | 8.45% | 8.84% | 14.65% |
1946 | 2.25% | 1.69% | 2.81% | 3.37% | 3.35% | 3.31% | 9.39% | 11.60% | 12.71% | 14.92% | 17.68% | 18.13% | 8.43% |
1945 | 2.30% | 2.30% | 2.30% | 1.71% | 2.29% | 2.84% | 2.26% | 2.26% | 2.26% | 2.26% | 2.26% | 2.25% | 2.27% |
1944 | 2.96% | 2.96% | 1.16% | 0.57% | 0.00% | 0.57% | 1.72% | 2.31% | 1.72% | 1.72% | 1.72% | 2.30% | 1.64% |
1943 | 7.64% | 6.96% | 7.50% | 8.07% | 7.36% | 7.36% | 6.10% | 4.85% | 5.45% | 4.19% | 3.57% | 2.96% | 6.00% |
1942 | 11.35% | 12.06% | 12.68% | 12.59% | 13.19% | 10.88% | 11.56% | 10.74% | 9.27% | 9.15% | 9.09% | 9.03% | 10.97% |
1941 | 1.44% | 0.71% | 1.43% | 2.14% | 2.86% | 4.26% | 5.00% | 6.43% | 7.86% | 9.29% | 10.00% | 9.93% | 5.11% |
1940 | -0.71% | 0.72% | 0.72% | 1.45% | 1.45% | 2.17% | 1.45% | 1.45% | -0.71% | 0.00% | 0.00% | 0.71% | 0.73% |
1939 | -1.41% | -1.42% | -1.42% | -2.82% | -2.13% | -2.13% | -2.13% | -2.13% | 0.00% | 0.00% | 0.00% | 0.00% | -1.30% |
1938 | 0.71% | 0.00% | -0.70% | -0.70% | -2.08% | -2.08% | -2.76% | -2.76% | -3.42% | -4.11% | -3.45% | -2.78% | -2.01% |
1937 | 2.17% | 2.17% | 3.65% | 4.38% | 5.11% | 4.35% | 4.32% | 3.57% | 4.29% | 4.29% | 3.57% | 2.86% | 3.73% |
1936 | 1.47% | 0.73% | 0.00% | -0.72% | -0.72% | 0.73% | 1.46% | 2.19% | 2.19% | 2.19% | 1.45% | 1.45% | 1.04% |
1935 | 3.03% | 3.01% | 3.01% | 3.76% | 3.76% | 2.24% | 2.24% | 2.24% | 0.74% | 1.48% | 2.22% | 2.99% | 2.56% |
1934 | 2.33% | 4.72% | 5.56% | 5.56% | 5.56% | 5.51% | 2.29% | 1.52% | 3.03% | 2.27% | 2.27% | 1.52% | 3.51% |
1933 | -9.79% | -9.93% | -10.00% | -9.35% | -8.03% | -6.62% | -3.68% | -2.22% | -1.49% | -0.75% | 0.00% | 0.76% | -5.09% |
1932 | -10.06% | -10.19% | -10.26% | -10.32% | -10.46% | -9.93% | -9.93% | -10.60% | -10.67% | -10.74% | -10.20% | -10.27% | -10.30% |
1931 | -7.02% | -7.65% | -7.69% | -8.82% | -9.47% | -10.12% | -9.04% | -8.48% | -9.64% | -9.70% | -10.37% | -9.32% | -8.94% |
1930 | 0.00% | -0.58% | -0.59% | 0.59% | -0.59% | -1.75% | -4.05% | -4.62% | -4.05% | -4.62% | -5.20% | -6.40% | -2.66% |
1929 | -1.16% | 0.00% | -0.58% | -1.17% | -1.16% | 0.00% | 1.17% | 1.17% | 0.00% | 0.58% | 0.58% | 0.58% | 0.00% |
1928 | -1.14% | -1.72% | -1.16% | -1.16% | -1.15% | -2.84% | -1.16% | -0.58% | 0.00% | -1.15% | -0.58% | -1.16% | -1.15% |
1927 | -2.23% | -2.79% | -2.81% | -3.35% | -2.25% | -0.56% | -1.14% | -1.15% | -1.14% | -1.14% | -2.26% | -2.26% | -1.92% |
1926 | 3.47% | 4.07% | 2.89% | 4.07% | 2.89% | 1.14% | -1.13% | -1.69% | -1.13% | -0.56% | -1.67% | -1.12% | 0.94% |
1925 | 0.00% | 0.00% | 1.17% | 1.18% | 1.76% | 2.94% | 3.51% | 4.12% | 3.51% | 2.91% | 4.65% | 3.47% | 2.44% |
1924 | 2.98% | 2.38% | 1.79% | 0.59% | 0.59% | 0.00% | -0.58% | -0.58% | -0.58% | -0.58% | -0.58% | 0.00% | 0.45% |
1923 | -0.59% | -0.59% | 0.60% | 1.20% | 1.20% | 1.80% | 2.38% | 3.01% | 3.61% | 3.59% | 2.98% | 2.37% | 1.80% |
1922 | -11.05% | -8.15% | -8.74% | -7.73% | -5.65% | -5.11% | -5.08% | -6.21% | -5.14% | -4.57% | -3.45% | -2.31% | -6.10% |
1921 | -1.55% | -5.64% | -7.11% | -10.84% | -14.08% | -15.79% | -14.90% | -12.81% | -12.50% | -12.06% | -12.12% | -10.82% | -10.85% |
1920 | 16.97% | 20.37% | 20.12% | 21.56% | 21.89% | 23.67% | 19.54% | 14.69% | 12.36% | 9.94% | 7.03% | 2.65% | 15.90% |
1919 | 17.86% | 14.89% | 17.14% | 17.61% | 16.55% | 14.97% | 15.23% | 14.94% | 13.38% | 13.13% | 13.50% | 14.55% | 15.31% |
1918 | 19.66% | 17.50% | 16.67% | 12.70% | 13.28% | 13.08% | 17.97% | 18.46% | 18.05% | 18.52% | 20.74% | 20.44% | 17.26% |
1917 | 12.50% | 15.38% | 14.29% | 18.87% | 19.63% | 20.37% | 18.52% | 19.27% | 19.82% | 19.47% | 17.39% | 18.10% | 17.80% |
1916 | 2.97% | 4.00% | 6.06% | 6.00% | 5.94% | 6.93% | 6.93% | 7.92% | 9.90% | 10.78% | 11.65% | 12.62% | 7.64% |
1915 | 1.00% | 1.01% | 0.00% | 2.04% | 2.02% | 2.02% | 1.00% | -0.98% | -0.98% | 0.99% | 0.98% | 1.98% | 0.92% |
1914 | 2.04% | 1.02% | 1.02% | 0.00% | 2.06% | 1.02% | 1.01% | 3.03% | 2.00% | 1.00% | 0.99% | 1.00% | 1.35% |
What is Inflation ?
Inflation is described as an overall increase in the costs of goods and services, as well as a decrease in money’s purchasing power. Inflation can be artificial in the sense that a central bank, king, or government can control the amount of money in circulation. In theory, adding more money to an economy reduces the value of each unit of money in circulation. The inflation rate is typically expressed as a percentage rise in prices over 12 months. Most developed countries attempt to maintain an inflation rate of 2-3% through fiscal and monetary policy.
Hyperinflation
Hyperinflation is defined as extreme inflation that rapidly reduces the real worth of a currency. It usually occurs when the money supply expands significantly while the GDP remains relatively stable. Ukraine experienced hyperinflation in the early 1990s, as did Brazil from 1980 to 1994, at which time their currencies became effectively worthless. These hyperinflationary economies generated terrible hardships for their citizens; Ukrainians and Brazilians had to cope by using stabilised foreign currencies and stockpiling finite resources with long-term worth, such as gold. Another well-known example of hyperinflation was Germany in the 1920s, when the government implemented stimulus measures such as printing money to fund WWI. This occurred at the same time that Germany was ordered to pay 132 billion marks in war reparations. As a result, economic activity plummeted, and shortages emerged. With too much money and insufficient goods and services, prices doubled every three days! The Papiermark, the German currency of the time, had lost so much value that people were using it instead of firewood to heat their homes. Hyperinflation caused so many people to live in poverty or flee the country.
While hyperinflation can be extremely damaging to an economy, modest amounts of inflation year after year are considered healthy. Because money will lose value in the future, customers are incentivized to spend rather than save it, and this motivation is critical to supporting a healthy economy.
Deflation
While inflation is not always good or bad depending on whether it is moderate or severe, deflation, the inverse of inflation, is rarely desirable in any economy. Deflation is described as a broad drop in the pricing of goods and services. In this scenario, customers are not motivated to spend because their money is expected to have higher purchasing power in the future. This slows and, in some cases, reverses what should be an upward-growing economy. The Great Depression brought with it a phenomenon known as the deflationary spiral. The notion behind a deflationary spiral is that when prices for products and services fall, profit decreases. Less profit means less expenditure. This, in turn, leads to decreased prices for goods and services, creating a negative feedback loop that can be extremely difficult to break.
Why Does Inflation Occur?
Macroeconomic theories seek to explain why inflation happens and how to best regulate it. Keynesian economics, which was the mainstream economic model in industrialised countries for the most of the twentieth century and is still commonly employed today, states that when there are significant imbalances between supply and demand for goods and services, large-scale inflation or deflation can emerge.
Cost-Push inflation – Consider the rising cost of oil as a result of political unrest; because so many goods and services rely on oil, their prices will rise to reflect the higher costs associated with running a firm that includes oil as an expense. This is known as cost-push inflation.
Demand-Pull inflation – This type of inflation occurs when demand exceeds an economy’s ability to produce. Because there aren’t enough products and services for everyone, more currency is exchanged for them.
Built-in inflation – Built-in inflation, often known as hangover inflation, is a sort of inflation caused by past events that are still felt today. It is closely tied to cost-push and demand-pull inflation, as these three types of inflation are the primary drivers of the current inflation rate. It is influenced by both subjective and objective factors that contribute to the persistence of inflation, such as inflationary expectations and the price/wage spiral.
The Monetarists
The Monetarists, a group of economists led by Milton Friedman, believed that the money supply, rather than markets, had the primary role in inflation. For example, the Federal Reserve (the United States’ central bank) can issue more money to raise supply or sell Treasury bills to reduce supply. Public institutions use monetary policy to help stabilise their respective currencies. Their ideals are founded on the Quantity Theory of Money, which asserts that changes in the money supply alter the value of the currency. The equation of exchange best exemplifies this:
MV = PY
Where:
M = money supply
V = Money velocity is defined as the number of times a unit of cash is involved in transactions each year.
P = price level
Y = economic output of goods and services
In the Equation of Exchange, total expenditure (MV) equals total sales revenue (PY). Economists often assume V and Y to be constant; the amount of transactions a currency undergoes in a year, as well as overall economic production, are far less variable than the money supply or price level. Assuming V and Y are essentially constant, M and P remain, resulting in the Quantity Theory of Money, which maintains that the money supply is directly proportionate to the value of the currency.
In actuality, a combination of Keynesian and Monetarist policies is implemented. Although Keynesians and Monetarists disagree, they both recognise the need of contrasting viewpoints. For example, Keynesians do not fully reject the significance of money supply in economies, while Monetarists do not completely disregard controlling demand for goods and services to control inflation.
How is Inflation Calculated?
In the United States, the Department of Labour is in charge of computing annual inflation rates. Typically, a basket of marketable goods and services is assembled, and the costs associated with them are compared across time. These statistics are then averaged and weighted using various algorithms, yielding in the United States a number known as the Consumer Price Index (CPI).
For example, to calculate inflation from January 2016 to January 2017, first check up the CPI for both months. Historical CPI data are available on the Bureau of Labour Statistics website:
Jan. 2016: 236.916
Jan. 2017: 242.839
Calculate the difference:
242.839 – 236.916 = 5.923
Calculate the ratio of this difference to the former CPI:
5.923
236.916
= 2.5%
The inflation rate from January 2016 to January 2017 was 2.5%. When the former period’s CPI is higher than the latter, deflation occurs rather than inflation.
Problems with Measuring Inflation
While the method given above for calculating CPI makes inflation appear straightforward, evaluating true currency inflation in the real world can be tricky.
Take, for example, the basket of goods and services used to calculate inflation from period to period. It is difficult to determine if the cost of certain goods and services fluctuate due to changes in quality or inflation. For example, did the price of a computer truly skyrocket, or was it due to new breakthrough technologies that made them more expensive?
Prices for specific items might skyrocket or plummet, causing instability. For example, increases in oil prices will cause higher inflation, although this is just transitory and may give the perception of higher inflation.
Inflation rates can have varying effects on people from different categories. For example, increased oil costs increase inflation for truck drivers while having a reduced impact on stay-at-home mothers.
While the CPI is the most commonly used index to measure inflation, there are others for more particular objectives. The CPI was originally known as the Harmonised Index of Consumer Prices (HICP) in the European Union. There is also an adjusted version of the CPI called CPIH, which adds housing expenditures such mortgage interest payments.CPIY is essentially CPI minus indirect taxes such as value-added tax (VAT) and excise duty, and it is useful for calculating inflation when tax rises last only a year. Excise duty is a tax imposed on items produced within a country. CPILFENS, the Consumer Price Index for All Urban Consumers Less Food and Energy is regarded as a less volatile form of CPI because it does not include food and energy in its basket. Food and energy prices can be extremely variable, leading to an inaccurate portrayal of inflation. For example, the weather has a significant impact on food supply and, consequently, food costs.
How to Beat Inflation?
Inflation is most severe for persons who have huge quantities of liquid cash sitting idle. Using the 2.5% inflation rate, a $50,000 checking account (that does not earn interest) will lose $1,250 in actual value by the end of the time. It is clear that when it comes to preserving money against moderate or severe inflation, it is generally preferable to do something other than keep it somewhere that does not yield interest. Inflation is the primary reason why financial experts recommend spending or investing rather than saving money. In a world where moderate inflation is the norm, there is little alternative but to spend, invest, or suffer some level of inflation-related loss.
Unfortunately, there is no perfect hedge against inflation. People often buy real estate, stocks, funds, commodities, TIPS, art, antiques, and other assets to hedge against inflation. Each of these investing possibilities has advantages and disadvantages. Investors typically buy multiple types of these assets to mitigate risk. Commodities and TIPS are more frequently mentioned because they are strongly linked to inflation. However, they are not always the best investment hedges against inflation.
Commodities
Investing in commodities, which include gold, silver, oil, copper, and a variety of raw materials or agricultural products, is a popular option for people to protect themselves from inflation because commodities have inherent value. Furthermore, when money loses value due to severe inflation, demand for goods might rise. For many centuries, gold has been seen as an efficient resource for hedging against inflation due to its finite nature and ease of storage. While other precious metals can be used to protect against inflation, gold is the most common.
TIPS
In the United States, there exist financial instruments known as TIPS, or Treasury Inflation-Protected Securities. These are bonds issued by the United States Treasury that are designed to protect against inflation. TIPS are a relatively efficient hedge against periods of high inflation because their principal is proportional to inflation as measured by indices such as the CPI. They typically account for only a tiny fraction of people’s portfolios, but anyone seeking further protection might choose to invest more space in their portfolio to TIPS. Because they are mainly unconnected to equities, which make up the majority of portfolios, they are also excellent diversifiers. In contrast to other bonds, TIPS maturation can be prolonged to gain term premiums while avoiding inflation risk. Other countries offer inflation-indexed bonds, such as the UK’s index-linked gilt, Mexico’s Udibonos, and Germany’s Bund index.