What Is Inflation and How Does It Affect Your Money?
Inflation is the rate at which prices for goods and services rise over time, which reduces what each dollar can buy. The Bureau of Labor Statistics (BLS) measures it with the Consumer Price Index (CPI). In August 2026, the CPI for All Urban Consumers was 3.4% higher than a year earlier, compared with the Federal Reserve's goal of 2% inflation over the longer run. At 3.4%, something that cost $100 a year ago costs about $103.40 today.
Inflation matters to you because your paycheck, savings and debts all respond to it differently. This guide explains what causes inflation, how the CPI is built, what the US record looks like since 1970, how much a rising price level erodes savings, and which tools (I bonds, TIPS, stocks, savings accounts) help protect your money. Test any dollar amount with our Inflation Calculator.
What Inflation Actually Is
Inflation is a sustained increase in the general price level. It does not mean every price rises: some goods get cheaper while others climb. It means that across a broad basket of goods and services, prices are higher on average than before, so a dollar buys less than it did.
Economists commonly group the causes into three types:
- Demand-pull inflation: demand for goods and services grows faster than supply, which pushes prices up.
- Cost-push inflation: higher costs for energy, materials or labor lead businesses to raise prices. The 1970s oil shocks are the classic example.
- Built-in inflation: people expect prices to keep rising, ask for higher wages, and businesses pass those costs on, which reinforces the cycle.
Real episodes usually mix these causes. The Federal Reserve says inflation of 2 percent over the longer run, measured by the annual change in the personal consumption expenditures (PCE) price index, is most consistent with its mandate of maximum employment and price stability.
Where Inflation Stands in 2026
The BLS reported that the CPI-U rose 0.4% in August 2026 on a seasonally adjusted basis and 3.4% over the previous 12 months. The index for all items less food and energy, known as core CPI, rose 2.4% over the year. Energy explains most of the gap: the gasoline index rose 27.4% and the energy index 16.3% over the 12 months, while shelter rose 3.0% and food 2.7%.
The 12-month rate has moved a lot during 2026. Comparing BLS index values with the same month a year earlier gives 2.4% in January, a high of 4.2% in May, and 3.4% in August. The 2025 annual average rate was 2.6%.
How Inflation Is Measured: The CPI
The CPI is published monthly by the BLS. According to the BLS, it records the prices of about 80,000 items each month and classifies spending into more than 200 categories, arranged into eight major groups. The CPI-U covers over 90 percent of the US population, specifically urban households.
Each group counts in proportion to how much households spend on it. These are the December 2025 relative importance weights:
| CPI group | Share of CPI-U | Examples |
|---|---|---|
| Housing (includes shelter at 35.6%) | 44.5% | Rent, owners' equivalent rent, utilities, furnishings |
| Transportation | 16.3% | Vehicles, gasoline, insurance, airfare |
| Food and beverages | 14.5% | Groceries, restaurant meals |
| Medical care | 8.4% | Doctor visits, prescriptions, health insurance |
| Education and communication | 5.8% | Tuition, phone service, internet, computers |
| Recreation | 5.1% | Streaming, sports, toys, pets |
| Other goods and services | 2.9% | Tobacco, personal care |
| Apparel | 2.4% | Clothing, shoes |
Percentages are rounded and may not add to exactly 100.
Because housing is such a large share, rent and shelter costs have an outsized effect on the headline number. Your own inflation rate depends on what you buy: a renter in a high-cost city and a homeowner with a fixed-rate mortgage can experience very different price changes. Core CPI removes food and energy, which move sharply from month to month, to show the underlying trend. The Fed's 2% target uses a related index, PCE, not the CPI.
Historical US Inflation Rates Since 1970
| Period | Average annual inflation (CPI-U) | Notes |
|---|---|---|
| 1970 to 1979 | 7.1% | Oil price shocks in 1973 and 1979 |
| 1980 to 1989 | 5.5% | The annual average peaked at 13.5% in 1980 (12-month high of 14.8% in March 1980) |
| 1990 to 1999 | 3.0% | |
| 2000 to 2009 | 2.6% | Prices fell 0.4% in 2009 |
| 2010 to 2019 | 1.8% | |
| 2020 | 1.2% | |
| 2021 | 4.7% | |
| 2022 | 8.0% | The 12-month rate hit 9.1% in June, the highest since 1981 |
| 2023 | 4.1% | |
| 2024 | 2.9% | |
| 2025 | 2.6% | BLS did not publish October 2025 prices because of the federal shutdown, so the annual average uses 11 months |
| 2026 | 3.4% | 12 months through August, not a calendar-year figure |
Decade figures are compound annual rates between annual-average CPI-U values (for example, 1969 to 1979). Single years compare each annual average with the year before. Over the long run, the CPI-U rose about 3.0% a year from 1926 to 2025.
How Inflation Erodes Your Savings
If your money grows more slowly than prices, you lose purchasing power even when your balance rises. This table shows what $10,000 held in cash would buy, in today's dollars, after different numbers of years:
| Years | At 2% inflation | At 3% inflation | At 3.4% inflation | At 8% inflation |
|---|---|---|---|---|
| 5 | $9,057 | $8,626 | $8,461 | $6,806 |
| 10 | $8,203 | $7,441 | $7,158 | $4,632 |
| 20 | $6,730 | $5,537 | $5,124 | $2,145 |
| 30 | $5,521 | $4,120 | $3,668 | $994 |
Purchasing power = original amount / (1 + inflation rate)^years
Example: $10,000 / (1.03)^20 = $5,537
At 3% a year, $10,000 loses about 45 percent of its purchasing power in 20 years. If inflation stayed at 2022's 8.0% for a decade, it would lose about 54 percent. Idle cash is the most exposed, so match where you keep money to how soon you need it. The Compound Interest Calculator shows how much growth you need to stay ahead.
Real vs. Nominal Returns
Nominal return is the raw percentage your money grows. Real return is what is left after inflation, your actual gain in purchasing power:
Real return = ((1 + nominal return) / (1 + inflation rate)) - 1
Using August 2026 inflation of 3.4%:
| Investment | Nominal return | Real return |
|---|---|---|
| Average savings account (FDIC national rate, Sep 21, 2026) | 0.37% | -2.9% |
| Average 12-month CD (FDIC national rate) | 1.73% | -1.6% |
| 3-month Treasury bill yield (Sep 29, 2026) | 4.25% | +0.8% |
| 10-year Treasury yield (Sep 29, 2026) | 5.26% | +1.8% |
| S&P 500 long-run average (1928 to 2025) | 10.0% | +6.4% |
The stock row is a historical average, not a forecast, and stock returns swing widely from year to year. Savings rates are national averages, so individual banks pay different rates. A savings account showing $10,500 after a year (5%) when inflation is 8% is a real loss of 2.8%, since 1.05 ÷ 1.08 - 1 = -2.8%.
How to Protect Your Money Against Inflation
No single option is best for everyone, but these are the main tools.
I bonds
Series I savings bonds pay a rate that combines a fixed rate with an inflation rate that resets every six months. For bonds issued from May 1, 2026 through October 31, 2026, the composite rate is 4.26%, which includes a 0.90% fixed rate. According to TreasuryDirect, one Social Security number can buy up to $10,000 in electronic I bonds per calendar year. You cannot redeem an I bond during its first 12 months, and if you cash it in within five years you lose the last three months of interest.
Treasury Inflation-Protected Securities (TIPS)
TIPS are issued in 5, 10 and 30-year terms. Their principal goes up with inflation and down with deflation, and they pay a fixed rate of interest every six months on the adjusted principal. At maturity you receive the adjusted principal or the original principal, whichever is greater. Unlike I bonds, TIPS trade on the secondary market, so their price can change before maturity.
Stocks
Stocks have outpaced inflation over long periods, but not smoothly. From 1928 through 2025 the S&P 500 with dividends averaged 10.0% a year, roughly 6.8% after the roughly 3.0% average inflation. In 2022, when inflation averaged 8.0%, the index fell 18.0% (then returned 26.1% in 2023). Treat stocks as protection for money you will not need for many years.
Real estate
Shelter costs in the CPI (rent and owners' equivalent rent) rose faster than prices overall from 1970 to 2025: up about 1,070% compared with 730% for all items. Owning a home with a fixed-rate mortgage also holds your principal-and-interest payment steady while prices and wages change. Property comes with maintenance, taxes and insurance costs that also rise, and it is hard to sell quickly.
Savings accounts and CDs
The national average savings rate is 0.37% and the average 12-month CD rate is 1.73% (FDIC, September 21, 2026), both below the 3.4% inflation rate. Savings accounts still have a role: they keep your emergency fund safe and available. Compare current offers, because rates vary widely by bank, and confirm FDIC or NCUA insurance.
What $100 in 1970 Buys Today
Using annual-average CPI-U, prices in 2025 were 8.30 times their 1970 level (321.943 ÷ 38.8):
$100 in 1970 ≈ $830 in 2025 (≈ $863 in August 2026 dollars)
$100 in 2025 ≈ $12.05 in 1970 dollars
Prices did not rise evenly. This table compares BLS CPI-U component indexes and wages for 1970 and 2025 annual averages:
| Category (annual average) | 1970 | 2025 | Change |
|---|---|---|---|
| Medical care (index) | 34.0 | 580.1 | +1,606% |
| Shelter (index) | 35.5 | 415.2 | +1,070% |
| Gasoline, all types (index) | 27.9 | 278.8 | +899% |
| Food and beverages (index) | 40.1 | 336.6 | +739% |
| All items (index) | 38.8 | 321.9 | +730% |
| New vehicles (index) | 53.1 | 178.5 | +236% |
| Apparel (index) | 59.2 | 131.3 | +122% |
| Average hourly earnings, production and nonsupervisory workers | $3.40 | $31.34 | +821% |
Index values use a 1982 to 1984 base of 100. The BLS adjusts new-vehicle prices for quality changes, which can make the vehicle index rise less than sticker prices.
On this measure, pay grew faster than prices: average hourly earnings for production and nonsupervisory workers rose 821% against 730% for all items, a gain of roughly 11% in purchasing power over 55 years, or about 0.2% a year. That series excludes benefits and does not describe every worker.
Matching Protection to Your Time Horizon
| Time horizon | Common choices | Trade-off |
|---|---|---|
| Under 1 year (emergency fund) | Savings account, money market | Safe and available, but rates may trail inflation |
| 1 to 5 years | I bonds, TIPS, CDs | I bonds and TIPS adjust for inflation; CDs lock a fixed rate; I bonds have a 12-month lock and $10,000 annual limit |
| 5 to 10 years | A mix of stocks and bonds or TIPS | Some growth, with some price swings |
| 10 years or more | Broad stock index funds | Highest historical return above inflation, with large drops such as 18.0% in 2022 |
The longer your horizon, the more room you have to take price swings in exchange for growth. Plan a target with our Savings Goal Calculator, and see how much your ROI is worth after inflation in our guide to how to calculate ROI. If you are negotiating pay, the Pay Raise Calculator shows what a raise is worth, and more planning tools are in our finance calculators.
Frequently Asked Questions
What is a normal inflation rate?
The Federal Reserve sets 2% inflation over the longer run as its goal, measured by the PCE price index. US consumer prices (CPI-U) rose about 3.0% a year from 1926 to 2025 on average, so rates between about 2% and 3% are typical over the long run. The 12-month rate reached 9.1% in June 2022, the highest since 1981, and stood at 3.4% in August 2026.
Is deflation good for consumers?
Falling prices sound good, but economists worry that sustained deflation can cause people to delay purchases and businesses to cut costs and jobs. Prices do sometimes fall: the annual average CPI-U dropped 0.4% in 2009. Price declines in single categories such as electronics are normal and separate from economy-wide deflation.
Do wages keep up with inflation?
Over the long run, yes for many workers, but not every year. BLS data for production and nonsupervisory workers show average hourly earnings rose 6.4% in 2022 while the CPI rose 8.0%, a real pay cut. Wage growth then ran ahead of 12-month inflation in every month with data from March 2023 through March 2026 (the BLS did not publish October 2025 prices). Since April 2026, as energy prices pushed inflation up, wages have trailed it: in August 2026 they were up 3.3% over 12 months against 3.4% inflation.
How does inflation affect debt?
It helps borrowers with fixed-rate debt. A fixed $1,500 monthly payment is worth about $1,116 in today's dollars after 10 years of 3% inflation (1,500 ÷ 1.03^10), so the same payment gets easier as prices and pay rise. Variable-rate debt does not offer this benefit because interest rates tend to rise when inflation does.
Should I change my investments when inflation is high?
A common approach is to keep a diversified long-term plan instead of reacting to headlines, because stocks can fall during inflation spikes and recover later, as they did in 2022 and 2023. The adjustment worth considering is your short-term money: an emergency fund in a low-rate account loses purchasing power, so compare savings accounts, CDs and I bonds against your timeline. For personal advice, talk to a licensed financial professional.
Sources
- Bureau of Labor Statistics. Consumer Price Index news release, August 2026 (published September 11, 2026), and CPI data series CUUR0000SA0 (CPI-U, all items, 1982 to 1984 = 100) with the related component series for food, shelter, medical care, new vehicles, gasoline and apparel.
- Bureau of Labor Statistics. Relative importance of components in the CPI, December 2025 and CPI questions and answers.
- Bureau of Labor Statistics. Current Employment Statistics (average hourly earnings of production and nonsupervisory employees, series CES0500000008).
- Federal Reserve. Why does the Federal Reserve aim for inflation of 2 percent?
- TreasuryDirect. I bonds and Treasury Inflation-Protected Securities.
- FDIC. National Rates and Rate Caps, September 2026.
- U.S. Department of the Treasury. Daily Treasury Par Yield Curve Rates, September 29, 2026.
- Damodaran A. Historical Returns on Stocks, Bonds and Bills, NYU Stern, data through 2025, updated January 2026.
All sources were checked in September 2026. Figures calculated from BLS index values (annual rates, 12-month rates and category changes) use the not seasonally adjusted CPI-U.