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What is Inflation?
Inflation reflects ongoing increases in the general price level of goods and services over time.
Have you ever been shopping and noticed that the prices of things you typically buy have gone up? If the items in your shopping basket cost $100 last year and now they cost $105, at a very basic level, that's inflation.
Is every price increase inflation?
No. Prices are changing all the time, but we don't say there is inflation every time we see a price increase. Instead, we say there is inflation when the prices of many of the things we buy rise at the same time and then continue to rise.
What’s the difference between a price increase and inflation?
The prices of individual goods and services can change because supply or demand for the items has changed. For example, the price of oranges can rise because of a frost in Florida, or the price of parking can go up during a sporting event because more people need parking spots. But these higher prices are not examples of inflation.
First, these prices probably won't continue to increase. The prices of oranges and parking will most likely return to where they were once the supply and demand conditions change. Second, these examples are for individual items, not a representative selection of goods and services. Inflation involves the prices of lots of items across several categories.
How can we tell if inflation is occurring?
We track inflation by looking at the prices of many items over time. Government statistical agencies regularly gather information about the prices of thousands of goods and services.
These collections of prices are combined into “price indexes,” and it’s their changes over time that are informative about inflation. If the level of an index is higher now than it was a month or year ago, it tells us that the prices contained in that index are higher on average, and that, in turn, tells us there is inflation.
Inflation calculator
What's a dollar worth?
Find out how far your dollar goes today compared with in previous years using the Minneapolis Fed's Inflation Calculator.
