What does an x% inflation rate actually mean?
"Let's say there's a product worth $10 in July and the inflation rate in August is 10%. Will it then cost $11 in August? Yes.  That's basically what inflation means. However.  The ""monthly"" inflation numbers you typically see are generally a year over year inflation rate on that month.  Meaning August 2017 inflation is 10% that means inflation was 10% since last July 2016, not since July 2017. At the micro consumer level, inflation is very very very vague.  Some sectors of the economy will inflate faster than the general inflation rate, others will be slower or even deflate.  Sometimes a price increase comes with a value increase so it's not really inflation.  And lastly, month over month inflation isn't something you will feel.  Inflation is measured on the whole economy, but actual prices move in steps.  A pear today might cost $1, and a pear in five years might cost $1.10.  That's 10% over 5 years or about 2% per year but the actual price change might have been as abrupt as yesterday a pear was $1 and now it's $1.10.  All of the prices of pears over all of the country won't be the same.   Inflation is a measure of everything in the economy roughly blended together to come up with a general value for the loss in purchasing power of a currency and is applicable over long periods.  A USD inflation rate of 3% does not mean the pear you spent $1 on today will necessarily cost $1.03 next year." As pointe out by @quid, inflation figures are almost always quoted as a comparison of prices last month, and prices a year ago last month.  So 10% inflation in August means that things cost 10% more than they did in August a year ago.  This can lead to some perverse conclusions. Consider an imaginary economy where prices stay constant over years.  Annualized inflation is zero. Then something happens on January 2nd, 2018.  Some crop fails, a foreign cheap source of something becomes unavailable, whatever.  Prices rise, permanently, as more expensive sources are used. This is the only disruption to prices. Nothing else goes wrong. So, in February, 2018, the authorities find that prices in January, 2018 rose by 1% over January 2017. Inflation! Politicians pontificate, economists wring their hands, etc. In March, again, prices for February, 2018 are found to be 1% higher than for February, 2017.  More wailing... This goes on for months.  Every month, inflation (year over year) is unchanged at 1%.  Everyone has a theory as to how to stop it... Finally, in February, 2019, there's a change!  Prices in January, 2019, were the same as in January 2018.  Zero inflation!  Everyone takes credit for bringing down inflation... "Individual product prices do not necessarily rise at inflation rates.  What inflation means is that the purchasing power of one unit of currency decreases by x% in a year, which is typically measured by looking at a broad spectrum of products in an economy and extrapolating to ""all products"".  So for all products across an economy, the aggregate price of all goods will, on average, be X% higher that they were this time last year.  Some products will be cheaper, some will be more expensive, but on average their prices will rise with inflation rates. For the other part of your question, inflation is an annualized percentage, so an inflation rate of 12% means prices are 12% higher than they were a year ago, so if you extrapolate that linear trend, prices will rise (again, on average) 1% in a month." "Inflation is an attempt to measure how much less money is worth. It is a weighted average of some bundle of goods and services price's increase.  Money's value is in what you can exchange it for, so higher prices means money is worth less. Monthly inflation is quoted either as ""a year, ending on that month"" or ""since the previous month"".  As the values differ by more than a factor of 10, you can usually tell which one is being referred to when they say ""inflation in August was 0.4%, a record high"" or ""inflation in August was 3.6%"".  You do need some context of the state of the economy, and how surprised the people talking about the numbers are.  Sometimes they refer to inflation since the last month, and then annualize it, which adds to the confusion. ""Consumer Inflation""'s value depends on what the basket of goods is, and what you define as the same ""good"".  Is a computer this year the same as the last?  If the computer is 10x faster, do you ignore that, or factor it in? What basket do you use?  The typical monthly consumables purchased by a middle class citizen?  By a poor citizen?  By a rich citizen?  A mixture, and if so which mixture? More detailed inflation figures can focus on inflation facing each quntile of the population by household income, split durable goods from non-durable goods from services, split wage from non-wage inflation, ignore volatile things like food and energy, etc. Inflation doesn't directly cause prices to raise; instead it is a measure of how much raise in prices happened.  It can easily be a self-fullfilling prophesy, as inflation expectations can lead to everyone automatically increasing the price they charge for everything (wages, goods, etc). Inflation can be viewed as a measurement of the ""cost of holding cash"".  At 10% inflation per year, holding a million dollars in cash for a year costs you 100,000$ in buying power.  At 1% inflation it costs 10,000$.  At 0.1% inflation, 1000$. Inflation of 10% in one year, followed by 10% the next, adds up to 1.1*1.1-1 = 21% inflation over the two years.  For low inflation numbers this acts a lot like adding; the further from 0% you get the more the lower-order terms make the result larger.  1% inflation for two years adds up to 2.01%, 10% over two years 21%, 100% over two years 300%, 1000% over two years 12000%, etc.  (and yes, some places suffer 1000% inflation)" Inflation is a reflection on the expansion of the money supply, aka debt,  being created by a central bank. Fiat currencies usually inflate, because there is no limit to the amount of debt that can be created. The consequences of reckless money supply expansion can be seen throughout history, see Zimbabwe, though there have been many others...Brazil, Argentinia, etc...
"The classic definition of inflation is ""too much money chasing too few goods.""  Within a tight range, say 1-3%, inflation is somewhat benign.  There's a nice inflation widget at The Inflation Calculator which helps me see that an item costing $1000 in 1975 would now (2010) be about $4000, and $1000 from 1984 till now, just over $2000. I chose those two years to make a point. First, I am 48, I graduated college in 1984, so in my working life I've seen the value of the dollar drop by half. On the other hand it only took 9 years from 75-84 to see a similar amount of inflation occur.  I'd suggest that the 26 year period is far more acceptable than the 9. Savers should be aware of their real return vs what was a result of inflation. I'm not incensed either way but logically have to acknowledge the invisible tax of inflation. I get a (say) 6% return, pay 2% in tax, but I'm not ahead by 4%, 3% may be lost to inflation. On the flip side, my mortgage is 3.5%, after taxes that's 2.625%, but less than 0% after (long term) inflation. So as a debtor, I am benefiting by the effect of inflation on what I owe.  Interesting also to hear about deflation as we've grown used to it in the case of electronics but little else. Perhaps the iPad won't drop in price, but every year it will gain features and competitors will keep the tablet market moving. Yet people still buy these items.  Right now, there's not enough spending. I'd suggest that, good financial advice aside, people as a whole need to start spending to get the economy moving. The return of some inflation would be a barometer of that spending starting to occur." "Suppose you have $100 today and suppose that hamburgers cost $5. If you are holding $100, you could buy 20 hamburgers at $5 each. Now suppose you take that $100 and stuff it under your mattress for 24 years. When you pull out your money, you still have $100, but it turns out hamburgers now cost $10.   The increase from $5 to $10 is inflation.   Your savings of $100 was ""eroded"" by half even though before and after you had $100 and now you can only buy 10 hamburgers instead of 20 hamburgers. Suppose inflation is 3%.   That means that if you earn 3% return on your investments, you'll stay even with inflation (If you can buy 20 hamburgers today, then at any point you can still buy 20 hamburgers).   If you want your money to grow in a real, tangible way you'll want to seek returns that beat the rate of inflation." Inflation data is a general barometer for inflation that a typical consumer would experience.  Generally when calculating inflation for yourself you would only include items that you use and in percentages of your budget.   Personal inflation is much more useful when attempting to calculate safe withdrawal rates or projections into the future. "Krugman argues (and I agree with him on this one) that this is a telltale sign that the US is in a [liquidity trap](http://en.wikipedia.org/wiki/Liquidity_trap). Basically interest rates are near 0 and the banks are very risk adverse right now, so they sit on reserves instead of lending them out. In this scenario, the government ""printing"" money has no effect on inflation (or much of anything) because it just sits in bank reserves.  A more right wing economist might spin a different story though." "he is saying that ""QE"" meaning ""quantitative easing"" meaning ""the theory that the government flooded the markets with money, artificially driving up the price of stocks"" meant that hedge funds, which HEDGE, and benefit from an up-and-down market, couldn't win in a market where it just kept going up.  It's basically a conspiracy theory bears have been pushing for years ""QE artificially inflated the market, it's gonna crash!""" Despite my previous claim to not respond to crank messages, no, you are also spectacularly ignorant of the basics about how inflation is calculated.  The Department of Labor Statistics has an army of people going into retail each month to evaluate comparables.  Heads of lettuce, gallons of milk and twinkies are not, in fact, 4x smaller than they were in 2007 and even if they were, DLS corrects for it. Yes - it's called the rate of inflation. The rate of return over the rate of inflation is called the real rate of return.   So if a currency experiences a 2% rate of inflation, and your investment makes a 3% rate of return, your real rate of return is only 1%. One problem is that inflation is always backwards-looking, while investment returns are always forward-looking. There are ways to calculate an expected rate of inflation from foreign exchange futures and other market instruments, though. That said, when comparing investments, typically all investments are in the same currency, so the effect of inflation is the same, and inflation makes  no difference in a comparative analysis.  When comparing investments in different currencies, then the rate of inflation may become important. "This is the best tl;dr I could make, [original](http://ngdp-advisers.com/2017/09/14/thinking-constrained-phillips-box-get-nightmarish-solutions/) reduced by 75%. (I'm a bot) ***** &gt; Grep Ip has an article: The Fed&amp;#039;s Bad Options for Addressing Too-Low Inflation in which he argues that what looks like a dream economy could be a nightmare for the Fed&amp;acute;s chairwoman.  &gt; The reason being that, according to the Fed&amp;acute;s Phillips Curve precepts to which the Fed subscribes, when unemployment is this low inflation should move up to the Fed&amp;acute;s 2% target.  &gt; Just as it reaped rising inflation by producing a rising NGDP growth trend, lowered inflation by producing a falling NGDP growth trend and kept inflation &amp;quot;On trend&amp;quot; by producing a stable NGDP growth trend, it can raise the level of the stable NGDP growth trend, which it stopped doing in 2010.   ***** [**Extended Summary**](http://np.reddit.com/r/autotldr/comments/70qy24/the_dangers_of_phillips_curve_thinking/) | [FAQ](http://np.reddit.com/r/autotldr/comments/31b9fm/faq_autotldr_bot/ ""Version 1.65, ~211779 tl;drs so far."") | [Feedback](http://np.reddit.com/message/compose?to=%23autotldr ""PM's and comments are monitored, constructive feedback is welcome."") | *Top* *keywords*: **Inflation**^#1 **Fed**^#2 **growth**^#3 **trend**^#4 **recession**^#5" you understand inflation is necessary for growth? inflation is an increase in the money supply. the fed has a policy of inflation targeting. they say okay we are fine with 2% inflation lets keep it at that level. and their policies aim to keep inflation at that level. I don't think this can be explained in too simple a manner, but I'll try to keep it simple, organized, and concise. We need to start with a basic understanding of inflation. Inflation is the devaluing of currency (in this context) over time. It is used to explain that a $1 today is worth more than a $1 tomorrow. Inflation is explained by straight forward Supply = Demand economics. The value of currency is set at the point where supply (M1 in currency speak) = demand (actual spending). Increasing the supply of currency without increasing the demand will create a surplus of currency and in turn weaken the currency as there is more than is needed (inflation). Now that we understand what inflation is we can understand how it is created. The US Central Bank has set a target of around 2% for inflation annually. Meaning they aim to introduce 2% of M1 into the economy per year. This is where the answer gets complicated. M1 (currency) has a far reaching effect on secondary M2+ (credit) currency that can increase or decrease inflation just as much as M1 can... For example, if you were given $100 (M1) in new money from the Fed you would then deposit that $100 in the bank. The bank would then store 10% (the reserve ratio) in the Fed and lend out $90 (M2) to me on via a personal loan. I would then take that loan and buy a new car. The car dealer will deposit the $90 from my car loan into the bank who would then deposit 10% with The Fed and his bank would lend out $81... And the cycle will repeat... Any change to the amount of liquid currency (be it M1 or M2+) can cause inflation to increase or decrease. So if a nation decides to reduce its US Dollar Reserves that can inject new currency into the market (although the currency has already been printed it wasn't in the market). The currency markets aim to profit on currency imbalances and in reality momentary inflation/deflation between currencies. What you said is technically correct. But the implication OP might get from that statement is wrong. If the Fed buys bonds and nominal yields go down (Sometimes they might even go up if it meant the market expected the Fed's actions to cause more inflation), inflation expectations don't go down unless real yields as measured by TIPs stay still. There's a difference between physical currency and money (For example a bank may only hold only a small percentage of total deposits as cash that it's customers can withdraw).   I'm not sure which you're referring to, but either way you should read  about inflation. Fascinating article. I have read that the Federal Reserve is contemplating allowing the unemployment rate to drop further until some of the elusive wage gains appear. Still seems risky if inflation suddenly shows up and rates have to rise fast to hold it off. yeah, its actually pretty stupid to brag about this sort of thing. it is my understanding that inflation averages about 2% a year so your numbers are off. my guess is that he is just bullshitting and has no idea what his financial people have done with the money. Can't be true.  I read r/economy and I know **real** inflation is 15%, **real** unemployment is 25%, we're in a double-dip recession, a second tsunami of mortgage foreclosure is coming, hundreds of cities are going to default on their bonds, and ...  And we're all going to die on the side of the road.  Alone.  In the rain.  Edit: [See](http://www.reddit.com/r/economy/comments/2dm13e/job_surge_suggests_higher_wages_are_coming/cjr00wh)?  And this guy is an optimist.