US Inflation Rate by Year from 1929 to 2022

The U.S. inflation rate by year is the percentage of change in product and service prices from one year to the next, or year-over-year. 

The inflation rate responds to each phase of the business cycle. That's the natural rise and fall of economic growth that occurs over time. The cycle corresponds to the highs and lows of a nation's gross domestic product (GDP). It measures all goods and services produced in the country.

The business cycle runs in four phases. The first phase is the expansion phase. This is when economic growth is positive, with a healthy 2% rate of inflation. The Federal Reserve considers this an acceptable rate of inflation.

As the economy expands past a 3% rate of growth, it can create an asset bubble. That's when the market value of an asset increases more rapidly than its underlying real value.

The second phase of the cycle is known as the peak. This is the time when expansion ends and contraction begins.

As the market resists any higher prices, a decline begins. This is the beginning of the third, or contraction, phase. The growth rate turns negative. If it lasts long enough, it can create a recession.

During a recession, deflation can occur. That's a decrease in the prices of goods and services. It can often be more dangerous than inflation.

As the economy continues its downward trend, it reaches the lowest level possible for the circumstances. This trough is the fourth phase, where contraction ends and economic expansion begins. The rate of inflation begins to increase again, and the cycle repeats.

During recessions and troughs, the Federal Reserve (the Fed) uses monetary policy to control inflation, deflation, and disinflation.

The Fed focuses on the Consumer Price Index for All Urban Consumers: Less Food and Energy. It excludes volatile gas and food prices. This measurement is more popularly known as the core inflation rate.

The Fed sets a target inflation rate of 2%. If the core rate rises much above that, the Fed will execute a contractionary monetary policy. It will increase the federal funds rate. This is the rate at which banks lend to each other overnight. Historically, this action reduces demand and forces prices lower.

The Fed can also lower the federal discount rate, which makes it cheaper to borrow money from the Fed itself. This is an attempt to increase demand and raise prices.

Other tools that the Fed uses are reserve requirements (increasing the amount held in reserves), open market operations (increasing transactions in U.S. securities), and reserve interest (paying interest in excess reserves to banks).

The best way to compare inflation rates is to use the end-of-year CPI. This creates an image of a specific point in time. For example, in 1933, January began with a CPI of -9.8%. By the end of the year, CPI had increased to 0.8%. If you were to calculate the average for the year, the average would be -5.1%. This gives you the idea that prices had fallen over the year when they had actually risen.

The table below compares the inflation rate (December end-of-year) with the fed funds rate, the phase of the business cycle, and the significant events influencing inflation. The most recent forecast is in the U.S. Economic Outlook.

The inflation rate demonstrates the health of a country's economy. It is a measurement tool used by a country's central bank, economists, and government officials to gauge whether action is needed to keep an economy healthy. That's when businesses are producing, consumers are spending, and supply and demand are as close to equilibrium as possible.

A healthy rate of inflation is good for both consumers and businesses. During deflation, consumers hold on to their cash because the goods will be cheaper tomorrow. Businesses lose money, cutting costs by reducing pay or employment. That happened during the subprime housing crisis. In galloping inflation, consumers spend now before prices rise tomorrow. That artificially increases demand. Businesses raise prices because they can, as inflation spirals out of control.

When inflation is steady, at around 2%, the economy is more or less as stable as it can get. Consumers are buying what businesses are selling.

Resources for Table

• Historical Inflation Rate, Bureau of Labor Statistics. Year-over-year rate.
• Historical Targeted Fed Funds Rate.
• Historical Fed Funds Rate, Federal Reserve Bank of New York. Used to estimate targeted fed funds rate before 1971.
• Historical Fed Funds Rate, Federal Reserve Bank of New York. Used to estimate targeted fed funds rate 1971-1989.
• Open Market Operations Archive, Federal Reserve Board. Targeted Fed Funds Rate 1990-2002.
• Open Market Operations, Federal Reserve Board. Targeted Fed Funds Rate 2003-2022.
• Recession History
• History of Gold Standard
• Business Cycle Dates, NBER
• National Income, and Product Accounts Tables: Table 1.1.1. GDP Growth Rate, BEA.
• The Fed uses complex computer models to create its forecasts. But so many variables change in between estimates that it's difficult to be precise three years out. The critical thing to recognize is that the Fed doesn't think inflation will be a credible threat any time soon.