What Is Inflation, and What Causes It? US Prices Since 1970

A basket of everyday goods that cost $100 in January 2000 cost $198 in August 2026. Nothing about the basket changed. The dollar bought less.

That is inflation. In June 2022, US prices were rising at 9.1% a year, the fastest pace in four decades. Here is what inflation is, how it is measured and what causes it, using US data since 1970.

Each month, the US Bureau of Labor Statistics prices a basket of goods and services: food, rent, fuel, cars, healthcare, haircuts and more. The consumer price index is the cost of that basket. Inflation is how much the index has risen over the past year.

Two versions get the most attention:

Core is the better guide to the underlying trend. Headline is closer to what people actually pay.

The US has a second main measure of consumer prices: the personal consumption expenditures (PCE) price index. It comes from a different agency, the Bureau of Economic Analysis. The Fed began to favour PCE in 2000. In January 2012, it made 2% a year on PCE its formal target.

The two differ in three ways:

CPI usually runs higher. From January 2000 to August 2026, CPI inflation was above PCE inflation in 83% of months, by 0.36 points on average. The gap was widest in June 2022, at 9.1% on CPI against 7.2% on PCE. In August 2026, both stood at 3.4%.

The chart shows headline CPI inflation each month since 1970. The dashed line is the Fed's 2% goal.

Two episodes stand out. The first peaked at 14.8% in March 1980, after a decade of oil shocks and loose policy. The second peaked at 9.1% in June 2022. Between them, from 1990 to 2019, inflation averaged 2.5% a year.

Prices rise across the board for three main reasons.

Demand runs ahead of supply. When people and governments spend more than the economy can produce, sellers can raise prices. This is called demand-pull inflation.

Costs rise. When an input like oil or wages gets more expensive, firms pass it on. This is cost-push inflation. A supply shock, such as a war or a broken supply chain, is the classic trigger.

Expectations feed on themselves. If workers expect prices to keep rising, they ask for higher pay. Firms then raise prices to cover it. Once that loop starts, it is hard to stop.

Money matters to all three. More money in the system makes it easier for spending to outrun supply.

The recent surge is a clear case study, because all three causes arrived together.

Demand. The US government spent heavily to support households through the pandemic, including the $2.2 trillion CARES Act in March 2020 and the $1.9 trillion American Rescue Plan in March 2021. The money supply (M2) grew 27% in the year to February 2021, the fastest in its record. Households had cash to spend, while factories and ports were still catching up.

Supply. Shipping jams and chip shortages raised the cost of goods in 2021. Then Russia invaded Ukraine in February 2022, sending energy and food prices higher.

Expectations. By late 2021, inflation was above 5% and climbing. Core CPI, which strips out energy and food, peaked at 6.6% in September 2022. Price rises had spread well beyond fuel.

The response. The Fed kept its policy rate near zero until March 2022. The effective federal funds rate then rose from 0.08% in February 2022 to 5.33% by August 2023. Higher borrowing costs cooled demand. Headline inflation fell below 3% in June 2023.

Three terms come up whenever inflation rises. They are related, but each works in a different way.

Fiscal spending is money spent by the government. When it spends more than it collects in tax, it borrows the difference. The 2020 and 2021 relief packages put cash straight into households' bank accounts.

Quantitative easing (QE) is the central bank buying bonds, mainly government bonds, with money it creates. The Fed's balance sheet grew from $4.16 trillion in late February 2020 to a peak of $8.97 trillion in April 2022. QE pushes down long-term interest rates. The new money mostly sits with banks as reserves, which households cannot spend.

Money printing is the loose name for the two working together. That is what happened in 2020 and 2021. From March 2020 to December 2021, the Fed bought $3.15 trillion of Treasury bonds. That was more than half of the $5.94 trillion of new government debt sold to the public. The government borrowed to send out cheques, while the Fed bought much of what it borrowed. This is when M2 grew 27%.

QE on its own did not bring high inflation. After the 2008 crisis, the Fed's balance sheet grew from $0.91 trillion to $4.50 trillion by the end of 2014. CPI inflation averaged 1.6% a year from 2009 to 2019. One difference in 2020 and 2021 was that the new money reached households, who spent it.

Inflation is a slow tax on cash. The same basket that cost $100 in January 2000 cost $153 in January 2020. It then cost $198 by August 2026. Prices rose 28% between January 2021 and August 2026 alone.

Cash that earns less than inflation loses buying power every year. This is why savers and investors look at real returns, which are returns after inflation.

Some assets cope better than others. Companies can raise their own prices as costs climb, which can support their shares. Bonds pay fixed amounts, which inflation erodes.

Inflation data comes out each month. A few lines tell you most of what matters:

Inflation is a rise in prices across the economy, measured over a year. It starts when demand outruns supply or costs jump. It lasts when people come to expect it.

This explainer is part of the YX Insights Academy. Each one takes a single idea and checks it against real data.

The same approach runs through everything else we publish:

Good places to start on the website:

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