Money & Finance › The Fed, money supply & inflation
Inflation: rising prices, shrinking purchasing power
· Concept
Fact, law or dataA rule, statute, definition or measured number.
Inflation is a broad, sustained rise in prices, which means each dollar buys less than before.
See it on the Money & Finance map →How it works
The Bureau of Labor Statistics measures it monthly with the Consumer Price Index (CPI), a basket of goods, services and rent; the Fed prefers the PCE index and targets 2% a year. Causes include too much money and demand chasing goods, cost shocks like oil, and expectations that feed wage and price rises. CPI peaked at 9.1% in June 2022 and, after the 2026 oil shock, ran about 3.4% in August 2026. TIPS and I bonds (TreasuryDirect) are indexed to CPI.
Why it matters
It quietly taxes cash and fixed incomes, lifts interest rates and shifts wealth from lenders to borrowers with fixed-rate debt.
Think of it like
Like a long lease with no rent escalator: the payment stays the same while what it buys shrinks every year.
Facts, rules and data
BLS CPI data back to 1913 and Commerce Department PCE data. At 3% inflation prices double in about 24 years; the dollar has lost over 85% of its value since 1971.
Debates and risks
Economists still argue how much of the 2021–22 surge came from stimulus and money growth versus supply-chain and energy shocks, and whether 2% is the right target.
Inside this (6)
Connections (11)
▸Song dynasty paper money (jiaozi) eventually suffered Inflation: rising prices, shrinking purchasing powerFact, law or data
The connection
To pay for wars against the Jin and then the Mongols, Southern Song governments printed ever more paper notes, by then called huizi. With more paper chasing the same goods, the notes lost value. The Yuan and Ming repeated the pattern until Ming notes became nearly worthless.
When and why
China, mainly the 1100s–1200s under the Southern Song, and again under the Yuan and Ming into the 1400s.
How we know
Official histories record rising note issues and falling exchange rates against copper coins and silver.
Debates and risks
How much the inflation weakened the Song before the Mongol conquest of 1279 is debated among historians.
▸Quantity theory of money (MV = PQ) links money growth to Inflation: rising prices, shrinking purchasing powerMainstream view
The connection
If money grows faster than the goods and services it buys, and spending habits (velocity) hold steady, prices must rise. The theory predicts that long-run inflation roughly equals money growth minus real output growth.
When and why
Jean Bodin, explaining silver-driven price rises in 1568; Irving Fisher in 1911; Friedman and Schwartz in 1963.
How solid is the link?
Cross-country data over decades show a strong money-inflation link, especially when inflation is high; year to year in low-inflation economies, the link is weak.
Debates and risks
Whether the 2020–22 jump in M2 caused the inflation, or both came from the same stimulus and supply shocks, is debated.
▸Inflation: rising prices, shrinking purchasing power erodes the store-of-value role in Three jobs of money: exchange, unit of account, store of valueFact, law or data
The connection
Money is a store of value only if it holds purchasing power. Inflation erodes it: at 3% a year, a dollar loses about a quarter of its value in 10 years. High inflation pushes people into real assets or foreign currency, and hyperinflation can break the unit-of-account role too.
When and why
Wherever money exists; most dramatically in Weimar Germany, Zimbabwe and Venezuela, where people switched to dollars or goods.
How we know
Price indexes measure the loss directly; dollarization in high-inflation countries shows people abandoning the failing money.
Debates and risks
Some economists argue modest, predictable inflation barely hurts money's jobs; others call any steady inflation a hidden tax on savers.
▸Monetary policy: steering interest rates and credit aims to stabilize Inflation: rising prices, shrinking purchasing powerFact, law or data
The connection
The Fed raises the fed funds rate when inflation runs above its 2% target. Higher rates make borrowing costlier and saving more rewarding, so spending, hiring and price increases slow, usually with a lag of a year or more. When inflation is low and jobs are scarce, it cuts.
When and why
The US Federal Reserve, formally targeting 2% PCE inflation since January 2012; the FOMC meets eight times a year.
How we know
Paul Volcker's high rates ended double-digit inflation by 1983; the 2022–23 hikes coincided with CPI falling from 9.1% to about 3%, though healing supply chains helped.
Debates and risks
How much of inflation's 2023 fall came from rate hikes versus supply recovery is debated, as is how long policy lags last.
▸TIPS: inflation-protected Treasuries protect against Inflation: rising prices, shrinking purchasing powerFact, law or data
The connection
Each month a TIPS bond's principal is multiplied by the change in the CPI-U price index. If prices rise 3% in a year, $1,000 of principal becomes about $1,030, and the fixed coupon is paid on the larger amount. Held to maturity, the investor keeps purchasing power; the market price can still fall if real yields rise.
When and why
Since the first TIPS auction in January 1997; the Treasury uses the BLS's CPI-U with roughly a three-month lag.
How we know
Treasury publishes the reference CPI and index ratio for every TIPS daily; payouts follow the published formula.
Debates and risks
Whether the CPI matches a given investor's costs, such as rent or health care, and whether taxes on the inflation adjustment erode the protection.
▸Series I savings bonds pay a rate tied to Inflation: rising prices, shrinking purchasing powerFact, law or data
The connection
Every May and November the Treasury resets the inflation part of the I bond rate from the six-month change in the CPI-U, annualized, and adds the bond's fixed rate. Each bond earns the new rate for six months from its own issue anniversary, so its value keeps pace with rising prices.
When and why
Rates are announced each May 1 and November 1 by Treasury's Bureau of the Fiscal Service, using Bureau of Labor Statistics CPI data.
How we know
The formula and every rate since 1998 are published at TreasuryDirect, and redemption values follow them exactly.
Debates and risks
Whether the six-month CPI lag shortchanges holders when inflation turns fast, and whether a near-zero fixed rate makes them worth holding long-term.
▸Gold and precious metals as investments are bought as a hedge against Inflation: rising prices, shrinking purchasing powerExperts disagree
The connection
Gold cannot be printed, so investors buy it, as coins, bars or gold ETFs, to protect wealth when they fear currencies will weaken. It soared in the 1970s, from $35 to about $850 an ounce by January 1980, then fell about 70% over two decades while prices kept rising.
When and why
Worldwide; in the US especially since private ownership became legal again at the end of 1974.
How solid is the link?
Price data show gold beating inflation over very long periods but with huge swings; year to year, its link to inflation is weak.
Debates and risks
Experts disagree whether gold hedges inflation or fear; its 2025 run past $4,000 an ounce tracked central-bank buying and geopolitics more than inflation.
▸Real estate as an investment has historically kept pace with Inflation: rising prices, shrinking purchasing powerMainstream view
The connection
Rents and replacement costs tend to rise with prices, so property income and values often keep up with inflation over time. Fixed-rate debt helps too: it is repaid in cheaper dollars. But inflation also brings higher interest rates, which raise cap rates and can push values down for years.
When and why
US and global property markets; tested in the 1970s and again in 2021–23, when rents rose but higher rates hit values.
How solid is the link?
Long-run studies, such as Jordà and colleagues' 'The Rate of Return on Everything' (2019), find housing, counting rents, beat inflation from 1870 to 2015; prices alone had long flat stretches.
Debates and risks
How well commercial property hedges inflation depends on lease terms; long fixed leases without escalators lag, and offices since 2020 show the limits.
▸US tariff surge of 2025–26 and the IEEPA ruling added to Inflation: rising prices, shrinking purchasing powerMainstream view
The connection
Importers paid the new duties and passed part of them on. Prices of tariff-exposed goods, such as furniture, appliances and auto parts, rose faster than other goods in 2025. Economists estimated tariffs added several tenths of a point to core inflation: a one-time jump in the price level unless it feeds into wages and expectations.
When and why
US goods prices, mid-2025 onward; the Fed under Jerome Powell cited tariffs as a reason inflation stayed above its 2% target.
How solid is the link?
CPI detail by category, the Harvard Pricing Lab's tracking of online prices, and Fed staff estimates show partial pass-through to consumers.
Debates and risks
How much foreign exporters and US firms' margins absorbed, and whether the effect proves one-time or persistent, is still being measured.
▸The 2026 Iran-war oil shock and the Fed's return to hikes re-accelerated Inflation: rising prices, shrinking purchasing powerFact, law or data
The connection
Oil feeds into gasoline, freight, airfares and many goods. When the war involving Iran disrupted Gulf oil supply from late February 2026, energy prices jumped and pushed overall inflation back up, to about 3.4% CPI in August 2026, after it had been drifting down.
When and why
From February 28, 2026, with effects in US price data from March through at least August 2026.
How we know
Monthly BLS CPI reports show energy driving the rise, and oil price data show the spike.
Debates and risks
The key open question is whether the shock stays in energy or spreads into wages and core prices, as it did in the 1970s.
▸Interest: the rent paid for using money becomes a 'real' rate after subtracting Inflation: rising prices, shrinking purchasing powerFact, law or data
The connection
The real interest rate is the stated rate minus inflation. A 5% CD during 3% inflation earns about 2% in real terms; if inflation tops the rate, the saver loses purchasing power. Lenders build expected inflation into rates, which is why rates rise when inflation does.
When and why
Formalized by Irving Fisher in 1896 and 1930 (the Fisher equation); visible in every bond market.
How we know
Yields on TIPS (sold at TreasuryDirect), which strip out inflation, can be compared with regular Treasury yields; the gap shows markets' expected inflation.
Debates and risks
How fully rates adjust to inflation, and why real rates swing so much (negative in 2020–21, about 2% by 2023–24), is debated.