Inflation has been a hot button discussion lately, particularly now that Americans are seeing increases in prices of nearly everything they buy, whether it is groceries, housing or anything else. You might be thinking of it on a higher level, or just watching your prices rise on things you buy each week.

So, you may ask: what is inflation, why does it happen, how does it impact you personally? This blog answers all your top questions about inflation in the U.S. in 2025 with a mix of deep insight and practical understanding.

What Is Inflation?

Simply put, inflation refers to the general increase in the level of prices of goods and services, which impacts the purchasing power of your dollar. To put it another way, inflation means your dollar does not go as far.

Here is an example. Assuming you buy a cup of coffee every morning, for $3.00. One year later that same cup of coffee is now $3.15. You may not think a 15-cent increase is much, but if all the products you purchase- rise proportionately- for the same amount of money each month, all of your monthly obligations will rise and more and more of your paycheck will go to purchasing the same goods you always purchased. This has effectively eroded your purchasing power.

Key Facts:

• Inflation is expressed as a percentage change in priceover time.
• Inflation effects everything from goods and services, rents, wages, and investments.
• Low, stable inflation is considered healthy for a growing economy; high or unpredictable inflation can cause economic instability.

How Does Inflation Work?

Inflation occurs when the economy experiences an imbalance in demand versus supply, cost structures, or monetary factors. When the consumption of goods and services expands faster than the supply, prices increase or can go up. Over time inflation adjusts the price levels of consumers when the costs of production increase such as work and resources. Businesses will pass along costs to the buyers in the goods and services they purchase.

Central banks like the Federal Reserve have prices regulates and economic sacrificies of inflation rates through the central bank raising or lowering interest rates. The rates are used to stimulate and slow borrowing tell consumers increase their demand against the price of goods and services.

What Causes Inflation?

The causes of inflation can be classified into different formats, but are generally shown through three formats:

1. Demand-Pull Inflation

Demand-pull inflation occurs when consumers demonstrate demand that exceeds supply. This is kind of like a bidding war, if people demands begins to exceed supply, sellers with the product can increase prices.

2. Cost-Push Inflation

Cost-push inflation occurs when production costs increase, and as like wages and linear costs increase, companies will generally raise prices in order to keep their profit margins. For example, if oil prices rise when the cost for increasing all forms of transportation increase and goods will become expensive.

3. Built-In Inflation

Built-in inflation occurs driven by expectation. If workers have an expectation that prices will going to increase in the near future, they will eventually demand higher wages. Which in line employers are pushing prices up to pay the rising wages of workers.

Other contributing factors could include:

• Supply chain disruptions (such as experienced in COVID-19)
• Geopolitical events (i.e., Russia-Ukraine)
• Central bank stimulus programs or too much money printing.

Why Was Inflation So High Recently?

Between 2021-2023, Americans were faced with the highest inflation seen in decades. A few situations converged:

• Recovery from a pandemic: While there was still supply chain disruption, demand came roaring back.
• Energy price shocks: Oil and gas prices spiked in relation to geopolitical turmoil.
• Labor shortages: Businesses increased worker compensation to attract workers which increased costs.
• Federal/universal stimulus payments: Households received government checks which increased household income and demand.

All of these factors contributed to a perfect storm for prices which led to inflation. Inflation peaked in June 2022 at 9.1% in the U.S., the highest level since 1981.

What is the inflation rate currently in the U.S.?

The inflation rate in the U.S. is at 3.2%. This rate is a significant reduction from the peak inflation levels of 2022. While it is still above the Federal reserve’s target inflation rate of 2%, this represents progress.

Breakdown of Inflation Trends in 2022:

• Food/grocery: prices have stabilized but are still 12% – 15% elevated prices from before pandemic levels.
• Housing: rents and mortgage rates are still elevated
• Prices for services that are subject to labour costs are going up, health care and education continue to increase prices at a steady level.
• Energy: Gas prices have cooled now, primarily because building business and consumer confidence allowed for increased production to meet demand.

How to Calculate Inflation Rate?

The key measure of inflation is the Consumer Price Index (CPI). The CPI tracks the average change over time in the prices of “basket” of consumer goods and services.

Basic Formula:

Inflation Rate (%) = [(CPI in Current Year – CPI in Previous Year) / CPI in Previous Year] x 100

Example:

If CPI in 2024 was 300 and in 2025 it is 309, then:

[(309 – 300) / 300] x 100 = 3% inflation rate

There are other indexes as well:

• Core CPI: Excludes energy and food; provides a less volatile measure
• PCE Price Index: Follows and monitored by the Fed; wider track than the CPI.

Is Inflation Going Down in 2025?

Yes, inflation is falling after the peak of late 2023, the aggressive interest rate increases enacted by the Fed has caused reductions in consumer spending habits and cooled housing markets.

Causes of Reduced inflation:

• Interest rate increases: Fed raises rates to over 5.5 percent by mid-2024.
• Adjusted supply chains: Global shipping rates returned to moderation.
• Changed Consumer habits: Americans, by and large became focused on price.
• Technological improvements: Automation and advanced systems continues to drive down overhead costs of goods and services manufactured.

Inflation is lower, but not gone and in-action prices are much higher than they were in 2020 and wages have not matched inflation.

What is the Federal Reserve’s Role in Controlling inflation?

The primary governmental body in the U.S. to maintain price stability is the Federal Reserve (the Fed). The Fed uses one primary tool to root out inflation, which is the Federal Funds Rate.

When inflation increases, the Fed:

• Increases interest rates to dissuade borrowing and consumption.
• Decreases the money supply with asset sales (quantitative tightening).
• Gives forward guidance to shift market expectations.

In 2023-2024, the Fed moved aggressively with rate hikes to wrangle inflation, stating it would prioritize price stability trade-offs with economic growth in the short-run.

Does the President Control Inflation?

The President does not control inflation directly, but the federal government’s policy decisions can impact inflation.

For example:

• Fiscal stimulus, or the stimulus checks increase household consumption.
• The tax policy can either lower taxes and stimulate demand that maybe will push prices upward.
• Then regulation, which can accelerate or slow down policies with energy, labor, or trade, impacting supply chains.

In the end, the Federal Reserve has more tools at its disposal that can impact inflation more immediately. However, the President can be the driver for the government’s policies to impact economic productivity and stability in the long-run.

Do Tariffs Cause Inflation?

Certainly, tariffs can have an effect on inflation. When the government applies tariffs on imported goods, then it is raising the prices of imported goods to those tariffs. However, these prices are ultimately borne by U.S. businesses or consumers.

Some examples of tariffs:

• Tariffs on Chinese goods by Trump’s presidency applied increased prices on computers, electronics, appliances, and furniture.
• Tariffs on steel and aluminum increased costs in construction and auto manufacturing.

Although tariffs can protect domestic industry; less competition and increased prices also can arise from tariffs, especially if even more expensive suppliers are available as an alternative.

Are Taxes and Inflation the Same?

No, taxes and inflation are different economic concepts.

1. Taxes are required payments to the government based on income, spending or property.
2. Inflation is the increase in prices over time that reduces your purchasing power.

Both can drain your wallet, however. When inflation runs high and taxes are also high, then households feel the squeeze. However, tax cuts when inflation is running high can add to demand and worsen inflation.

Are Bonds Affected by Inflation?

Yes, absolutely. Bonds are extremely inflation-sensitive. As prices increase due to inflation, the real return on a bond (return after inflation) shrinks because,

Effect of inflation on Bonds:

• Fixed rate bonds: Decrease value because interest payments do not increase due to inflation.
• TIPS (Treasury Inflation Protected Securities): Have inflation-adjusted returns, and are popular during inflationary periods.
• Inflation usually drives investors to shift to other assets, such as real estate or stocks, as those usually provide a better hedge against inflation.

Will inflation ever return to pre-2020 levels?

Economists are mixed. Inflation is substantially lower than it peaked, however, a return to pre-pandemic levels (less than 2%) may take some time and the collective stability of the world may impact inflation.

Key Things to Keep in Mind:

• Global energy prices
• Climate-related disruptions to agriculture
• U.S. housing supply and interest rates
• Employment outlook (strength of labor markets)

Most forecasts keep inflation between 2.5% and 3.5% until at least 2026, unless there are big shocks.

Conclusion – Why Inflation Matters?

Inflation touches everyone’s life from the perspective of the cost of living, savings rates and financing options, future plans, investments, spending habits, etc. Comprehending how inflation functions can help you develop better planning and decision making around your finances.

For tracking inflation, watch the Fed’s monetary policy moves, the CPI figures that come out monthly, and trends in the energy sector and housing prices. Don’t forget you can’t control inflation, but you can do something about how you plan for it!

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