A:

Inflation is the rate at which the general level of prices for goods and services rises and results in a decrease in purchasing power of a country's currency.

Inflation is calculated using the yearly change in the consumer price index (CPI), which was first introduced in 1913. CPI data before 1913 is estimated using a variety of methods and sources.

The Highest Inflation Rate in U.S History

Since the founding of the United States in 1776, the highest year-over-year inflation rate observed was 29.78 percent in 1778. In the period of time since the introduction of the CPI, the highest inflation rate observed was 19.66 percent in 1917.

Year-over-year inflation is calculated by subtracting the value of the CPI at the beginning of the year, and subtracting the value at the end of the year. This result is divided by the value of the CPI at the beginning of the year and multiplied by 100. CPI data since its formal introduction as an index has been widely viewed as an accurate description of consumer prices in the United States. CPI data before 1913 is more problematic due to under-reporting, over-reporting, lack of data and different reporting standards utilized.

The Federal Reserve and Inflation

Before the introduction of the U.S. Federal Reserve by the Federal Reserve Act in 1913, the U.S. economy grew in fits and starts. Periods of rapid inflation and growth in asset prices were followed by severe shocks and panics. Between 1775 and 1913, the United States experienced four separate periods of double-digit inflation.

The U.S. Federal Reserve is mandated to act in an effort to moderate inflation using policy measures where it will intervene in currency, debt and equity markets to achieve this goal. Since the 1980s, the United States has enjoyed a lengthy period of low inflation, with U.S. Federal Reserve chairs often noting concerns regarding deflation rather than inflation. In the years following the 2008 financial crisis, the Fed has kept interest rates at historically-low levels and initiated a bond-buying program (since discontinued) known as quantitative easing to help stimulate the economy – although not without its share of outspoken critics.

RELATED FAQS
  1. What is Inflation and How Should it Affect my Investing?

    Learn how the rate of inflation represents the rate at which the real value of an investment is eroded, and the loss in spending ... Read Answer >>
  2. How Can Inflation Be Good for the Economy?

    Find out why some economists and public policy makers believe that inflation is a good, or even necessary, phenomenon to ... Read Answer >>
  3. How does the current cost of living compare to 20 years ago?

    Find out how inflation has affected the dollar since 1998, and how the cost of living has changed above and beyond what can ... Read Answer >>
  4. What is the relationship between inflation and interest rates?

    As interest rates are lowered, more people are able to borrow more money, causing the economy to grow and inflation to increase. ... Read Answer >>
  5. What is the difference between inflation and stagflation?

    Inflation is a term used by economists to define broad increases in prices. Inflation is the rate at which the price of goods ... Read Answer >>
Related Articles
  1. Insights

    Inflation's Impact on Stock Returns

    Learn about the impact inflation can have on stock returns. Find information on what types of stocks perform during times of high inflation or low inflation.
  2. IPF - Banking

    How Inflation Affects Your Cash Savings

    Prices tend to rise over time and this inflation can cut into the value of your savings. Here are some ways you can manage the situation.
  3. Insights

    Inflation and Economic Recovery

    Inflation impacts the costs of every facet of the economy. Discover how it can help or hinder the economic recovery.
  4. Insights

    How Inflation Rates Impact Your Retirement Savings

    Understanding the risks and likely rate of inflation can help investors craft a strategically, well-diversified retirement portfolio.
  5. Financial Advisor

    Why Inflation Feels Higher Than the Fed's Target Rate

    Follow the monthly readings on core PCE inflation in the Personal Income and Outlays reports to understand the Federal Reserve's inflation assessments.
  6. Investing

    How S&P 500, Dow Stocks May Get Killed by Low Inflation

    Investors beware. Today's low inflation may no longer help stocks outperform
  7. Insights

    9 Common Effects of Inflation

    Is inflation ever good? If you like your job it is.
  8. Insights

    Is U.S. Inflation on the Horizon?

    Inflation, or the general price level of all goods and services in an economy, has remained subdued in the years following the Great Recession. Given recent developments, is the U.S. on the verge ...
  9. Trading

    How CPI Affects the Dollar Against Other Currencies

    Here's a look at the Consumer Price Index is a broad measure of inflation, and how it has a dramatic impact on a currency's value against rival currencies.
  10. Investing

    Maximize Your Real Rate of Return for Retirement

    Learn to understand how to plot your portfolio's real rate of return for retirement planning to safeguard your retirement funds against inflation.
RELATED TERMS
  1. Inflation

    Inflation is the rate at which the general level of prices for ...
  2. Headline Inflation

    Headline inflation is the raw inflation figure reported through ...
  3. Price Inflation

    Price inflation is the increase in a collection of goods and ...
  4. Zero Coupon Inflation Swap

    A zero coupon inflation swap is an exchange of cash flows that ...
  5. 1913 Federal Reserve Act

    The 1913 Federal Reserve Act was U.S. legislation that created ...
  6. Treasury Inflation Protected Securities - TIPS

    Treasury inflation protected securities are securities that are ...
Trading Center