Some offers on this page are from advertisers who pay us, which may affect which products we write about, but not our recommendations. See our Advertiser Disclosure . What is inflation, and how does it affect you? Inflation affects the prices of everything from groceries to housing. K Kat Tretina Wed, August 12, 2026 at 8:18 AM PDT 5 min read Inflation is a term that refers to prolonged price increases. Put simply, inflation is the reason why your dollar doesn't go as far as it used to in the past. As prices rise, you get less for your money. For example, in March 2020, the average price of a dozen eggs was $1.53. Today, it's $2.14. You can calculate the inflation rate for a specific product or service with a simple formula: [(Current Price-Original Price) / Original Price] x 100 For example, to measure the inflation rate for a dozen eggs, you'd enter the following: [($2.14-$1.53) / $1.53] x 100 [$0.61 / $1.53] x 100 0.40 x 100 = 40 As you can see, the price of a dozen eggs has increased by about 40% over six years. When inflation rates are high, it gets harder to afford everyday essentials. Unless your pay has increased along with inflation, your salary won't go as far, and you'll have to trim your budget or take on another job to afford your lifestyle. How is inflation measured? The Federal Reserve , the central bank of the U.S., is responsible for measuring inflation and creating policies to regulate the economy. It doesn't look at a single product or category; it calculates inflation by looking at market indices that track the price changes of some of the most common goods and services to gauge inflation. One of the most commonly used indices is the Consumer Price Index (CPI) for all Urban Consumers an index that tracks expenses such as food, gas, housing, utilities, and transportation. The CPI tracks price changes over a specific period; price changes over 12-month periods are usually what experts refer to when discussing inflation. What causes inflation? There are many factors that contribute to inflation, but economists tend to focus on two main ones: demand-pull inflation and cost-push inflation. Demand-pull inflation Demand-pull inflation occurs when there is widespread demand for goods and services, and that demand outpaces the supply or what the economy can produce. When companies can't keep up with the demand, prices skyrocket, driving inflation. Demand-pull inflation was evident during the COVID-19 pandemic. With some workplaces shut down and international shipments paused or delayed, the supply of certain items, such as cars and electronics, was down. As a result, prices increased rapidly, driving the record inflation rates we saw in 2020 through 2022. Cost-push inflation With cost-push inflation, the cost of producing goods and services causes businesses to raise prices. This can occur if labor costs increase or if it becomes more difficult to import necessary raw supplies. When these price increases occur across several industries, it can...
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