Inflation: What It Actually Is and Why You Should Care

A Glass House Guide

Why your dollar buys less than it used to—and what to do about it.

The 30-Second Version

Inflation is when prices go up over time. The same $20 bill buys fewer groceries this year than last year. Your money didn't shrink—what it can buy did.

A little inflation (2-3%) is normal and actually healthy. A lot of inflation (5%+) squeezes your budget and makes you feel poorer even if your paycheck is the same.

Now let's dig deeper.

Part 1: What Inflation Really Means

The Allowance Analogy

Imagine you're a kid with $10 a week in allowance.

Last year: $10 bought 10 candy bars at $1 each. This year: Candy bars cost $1.25. Now your $10 only buys 8 candy bars.

Your allowance didn't change. But your purchasing power—what your money can actually buy—went down.

That's inflation.

Now apply this to your adult life:

The same groceries cost more
The same rent buys less apartment
The same salary feels tighter

Your paycheck might be the same, but if prices rose 5% and your raise was only 2%, you got effectively poorer.

The Inflation Rate

When news says "inflation is 3.4%," they mean: On average, stuff costs 3.4% more than it did a year ago.

The government calculates this by tracking prices of hundreds of common items—groceries, gas, rent, clothes, healthcare—and bundling them into the Consumer Price Index (CPI).

Inflation Rate

What It Feels Like

0-2%	Prices feel stable. You barely notice.
2-3%	Normal. Small increases, nothing dramatic.
3-4%	You notice. Groceries and gas cost more.
4-6%	Tight. Your budget doesn't stretch as far.
6-8%	Painful. You make trade-offs—skip dinners out, delay purchases.
8%+	Crisis. You dip into savings or go into debt just to maintain life.

For reference:

2021-2022: Inflation hit 9%—the highest in 40 years
2023-2024: Dropped to 3-4%—better but still elevated
The Fed's target: 2%—the "sweet spot" they aim for

Part 2: Why Prices Go Up

Inflation doesn't just happen randomly. There are specific causes.

Cause #1: Too Much Money Chasing Too Few Goods (Demand-Pull)

Imagine there are 100 people who want to buy TVs, but only 50 TVs available. What happens?

People start offering more money to get one. The store raises prices because they can. TVs that cost $500 now cost $700.

This happens when:

People have more money to spend (stimulus checks, low interest rates)
Supply can't keep up with demand (factories can't make stuff fast enough)

During COVID, both happened: The government sent stimulus checks (more money) while factories shut down (less stuff). Result: prices spiked.

Cause #2: Stuff Costs More to Make (Cost-Push)

If oil prices spike, everything that uses oil—gas, shipping, plastics—gets more expensive. Those costs get passed to you.

This happens when:

Energy prices rise (oil, natural gas)
Supply chains break (shipping delays, shortages)
Wages rise sharply (workers demand more, companies charge more)
Raw materials spike (lumber, steel, computer chips)

The 2021-2022 inflation was partly this: oil prices spiked, shipping costs tripled, computer chips were scarce. Everything cost more to make, so everything cost more to buy.

Cause #3: Expectations (Self-Fulfilling Prophecy)

If everyone expects prices to rise, they start acting that way:

Workers demand higher wages to keep up
Companies raise prices because they expect costs to rise
Landlords hike rent because they assume everyone else will

This is why the Fed cares so much about "inflation expectations." Once people believe inflation is here to stay, it becomes harder to stop.

What Usually Drives Major Inflation

Cause

Example

Government prints too much money	1970s, post-COVID stimulus
Oil/energy shock	1973 oil crisis, 2022 Russia-Ukraine war
Supply chain collapse	COVID-19 pandemic
War	Usually causes both supply shocks and money printing
Wage-price spiral	Workers and companies chase each other upward

Part 3: Who Wins and Loses From Inflation

Inflation isn't neutral. It helps some people and hurts others.

Who Gets Hurt

Fixed-income earners: If you're retired on a fixed pension, inflation eats away at it. Your $2,000/month check buys less every year.

Savers: If your savings account pays 1% interest but inflation is 5%, you're losing purchasing power. Your money is shrinking in real terms.

Workers without raises: If your paycheck stays the same but prices rise 5%, you effectively took a 5% pay cut.

Renters (short-term): Landlords raise rent to keep up with their own rising costs.

Who Benefits

Borrowers: If you have a fixed-rate mortgage at 3% and inflation is 6%, you're paying back with "cheaper" dollars. Your debt is effectively shrinking in real terms.

Asset owners: Homeowners, stock owners, people with hard assets. When prices rise, so does the value of your house and investments.

Workers who can negotiate: If you can demand raises that keep up with inflation, you're fine. Essential workers and high-demand skills have leverage.

The government: The U.S. owes trillions in debt. Inflation makes that debt easier to pay back with "cheaper" dollars.

The Bottom Line

Inflation is a hidden transfer of wealth:

From savers to borrowers
From fixed-income to flexible-income
From people holding cash to people holding assets

This is why financial advice during inflation usually includes: "Don't hold too much cash" and "Own assets that appreciate."

Part 4: How Inflation Is Measured

The government tracks inflation through price indexes. The two main ones:

CPI (Consumer Price Index)

This is the headline number you hear on the news.

It tracks prices of a "basket" of goods that typical consumers buy:

Food and beverages (13%)
Housing/shelter (34%)—the biggest category
Transportation (16%)
Medical care (8%)
Recreation (5%)
Other stuff (clothes, education, etc.)

"Core CPI" strips out food and energy prices because they're volatile. The Fed pays more attention to core because it shows the underlying trend.

PCE (Personal Consumption Expenditures)

This is the Fed's preferred measure. It's calculated differently and is usually a bit lower than CPI.

You don't need to understand the technical differences. Just know that when the Fed talks about 2% inflation, they mean PCE. When news talks about inflation, they usually mean CPI.

Why These Numbers Might Not Match Your Life

The CPI is an average across the country and across all spending patterns. But your inflation depends on what you buy.

If you rent in a hot city: Your inflation is probably higher (shelter is 34% of CPI)
If you own your home outright: Shelter costs don't hit you the same way
If you drive a lot: Gas price swings affect you more
If you're older: Healthcare costs (which rise faster) hit harder

The official inflation rate is a useful benchmark, but your personal inflation rate might be different.

Part 5: How the Fed Fights Inflation

When inflation gets too high, the Federal Reserve steps in. Their main tool: raising interest rates.

The Logic

Fed raises interest rates
Borrowing becomes more expensive (mortgages, car loans, credit cards, business loans)
People and businesses borrow less
They spend less
Demand drops
Prices stop rising so fast

It's like pumping the brakes on the economy. Less spending = less demand = prices stabilize.

The Cost

The problem: Slowing the economy has side effects.

Companies hire less (or lay off workers)
Home sales drop
Stocks often fall
Recession risk increases

The Fed is always trying to slow inflation without crashing the economy into recession. This is called a "soft landing"—and it's really hard to pull off.

The 2022-2024 Example

In 2022, inflation hit 9%—a 40-year high.

The Fed responded aggressively:

Raised rates from near 0% to over 5% in about 18 months
The fastest rate hike cycle in decades

What happened:

Mortgage rates went from ~3% to ~7%
Home sales plummeted
Stocks fell 20%+ in 2022
But inflation came down from 9% to 3%
And (surprisingly) no recession hit

This was considered a success—inflation tamed without massive unemployment. But it's not over until inflation settles back to 2%.

Part 6: Deflation—The Opposite Problem

Deflation is when prices fall over time. That sounds great—who doesn't want cheaper stuff?

But it's actually dangerous.

Why Falling Prices Are Bad

If prices are falling, why buy today when it'll be cheaper tomorrow?

People delay purchases. Businesses sell less. They cut costs and workers. Unemployed workers spend even less. Prices fall further. It's a downward spiral.

Japan's "Lost Decade(s)" is the classic example. Prices fell or stayed flat for years. Growth stagnated. The economy barely moved for 20+ years.

The 2% Target

This is why the Fed targets 2% inflation, not 0%. A little inflation:

Encourages spending (buy now before prices rise)
Gives the Fed room to cut rates during recessions
Allows wages to adjust without nominal cuts (easier to give 0% raise during 3% inflation than a 3% pay cut during 0% inflation)

The Goldilocks zone: Not too hot (high inflation), not too cold (deflation). Just right (2%).

Part 7: Types of Inflation

Not all inflation is the same. Here are the varieties:

Creeping Inflation (2-3%)

Normal, healthy. Barely noticeable. This is what the Fed aims for.

Walking Inflation (3-5%)

Noticeable but manageable. The Fed gets concerned and may act.

Galloping Inflation (10-50%)

Serious problem. Savings lose value fast. Economic instability.

Hyperinflation (50%+ monthly)

Catastrophic. Money becomes nearly worthless. Examples:

Germany in the 1920s (prices doubling every few days)
Zimbabwe in the 2000s (printed 100 trillion dollar bills)
Venezuela in the 2010s (people weighing cash instead of counting it)

This doesn't happen accidentally. It requires massive money printing, usually to pay for wars or collapsing governments. The U.S. is nowhere near this.

Stagflation

The worst combo: High inflation + high unemployment + slow growth.

Normally, high inflation means a hot economy with lots of jobs. Stagflation breaks that pattern—prices rise even as the economy stalls.

The 1970s had stagflation: oil shocks + bad policy = high prices AND high unemployment. It was miserable.

Part 8: Inflation Through History

The 1970s: Inflation Out of Control

Oil prices quadrupled after Arab oil embargo (1973)
A second oil shock in 1979 (Iranian revolution)
Inflation hit 13%+ at its peak
The Fed, under Paul Volcker, raised rates to nearly 20%
This triggered a brutal recession but finally killed inflation

Lesson: Sometimes beating inflation requires painful medicine.

The 1980s-2000s: The Great Moderation

Inflation stayed low (2-4%) for decades
Global trade kept prices down (cheap imports from China)
Technology improved productivity
The Fed learned to manage expectations

People started thinking inflation was "solved."

2008 Financial Crisis: Deflation Scare

Economy collapsed
The Fed cut rates to zero and printed money (quantitative easing)
Many feared this would cause massive inflation
It didn't—the economy was too weak to generate demand

Lesson: Printing money doesn't automatically cause inflation if demand is dead.

2021-2023: Inflation Returns

COVID shutdowns disrupted supply chains
Government sent massive stimulus checks
Demand surged while supply couldn't keep up
Energy prices spiked (Russia-Ukraine war)
Inflation hit 9%—the highest since the 1980s

Lesson: Inflation can return quickly when supply and demand get out of balance.

Part 9: What You Can Do About Inflation

You can't control the Fed. But you can adjust your personal finances.

Protect Your Purchasing Power

Don't hold too much cash. Savings accounts often pay less than inflation. Your money is losing value sitting there.

Options that typically keep up with or beat inflation:

Stocks (long-term)
Real estate (you live in it AND it appreciates)
I-Bonds (Treasury bonds that adjust for inflation)
TIPS (Treasury Inflation-Protected Securities)

Lock In Fixed Rates When They're Low

If you have a fixed-rate mortgage at 3%, that's amazing during high inflation. Your payment stays the same while everything else rises.

When rates are low:

Lock in fixed-rate mortgages
Refinance if you can lower your rate
Avoid variable-rate debt

When rates are high:

Wait to buy if possible
Consider adjustable rates only if you plan to refinance later

Negotiate Your Pay

The only way for workers to keep up with inflation is getting raises.

Know your market value. If inflation is 5%, you need at least a 5% raise just to stay even. Anything less is a pay cut in real terms.

In high-inflation environments:

Ask for raises explicitly tied to cost of living
Consider job-hopping (new jobs often pay more than raises)
Build skills that are in demand

Adjust Your Budget

During high inflation:

Cut discretionary spending
Delay big purchases if possible
Shop sales, buy generic brands
Avoid new debt (especially variable-rate)

Don't panic. Inflation cycles don't last forever. The 2022-2023 spike is already coming down.

Part 10: Common Inflation Myths

"Inflation is always the government's fault"

Partly true, partly not. Government spending and Fed policy can cause inflation, but so can:

Oil shocks (geopolitics)
Supply chain problems (pandemics, wars)
Natural disasters

The 2021-2022 inflation was a mix: government stimulus + Fed policy + COVID supply shocks + Russia invading Ukraine.

"Printing money always causes inflation"

Not directly. The Fed "printed" trillions after 2008 and inflation stayed low for over a decade. Why?

Money printing only causes inflation if people spend that money. After 2008, banks hoarded cash and consumers were scared. No spending = no inflation.

After COVID, stimulus went directly to consumers who spent it immediately. That's why prices spiked.

"We should aim for zero inflation"

Actually dangerous. Zero inflation risks tipping into deflation. A little inflation keeps the economy moving and gives the Fed room to maneuver.

"Inflation always hurts everyone"

Not equally. Inflation hurts savers and fixed-income people. It can actually help borrowers (paying back with cheaper dollars) and asset owners (house values rise).

"The government lies about inflation numbers"

Conspiracy theories aside, CPI is imperfect but not fake. The methodology is public. Critics argue it understates housing costs or overstates how much people substitute cheaper goods.

But the Bureau of Labor Statistics isn't inventing numbers. The measure is imperfect, not fraudulent.

Part 11: Inflation and Your Life Decisions

Buying a House

During high inflation:

Home prices often rise (it's an asset)
But mortgage rates also rise (costs more to borrow)
Monthly payments could be higher even if prices drop

Ideal timing: Buy when rates are low, even if prices are high. You can refinance if rates drop; you can't refinance your purchase price.

Retirement Planning

Inflation is your retirement's worst enemy.

If inflation averages 3% over 30 years, prices will more than double. Your retirement needs to account for this.

Strategies:

Keep a portion in stocks (they historically beat inflation)
Social Security adjusts for inflation (COLA)
Annuities can have inflation adjustments
Plan for higher healthcare costs (they rise faster than general inflation)

Salary Negotiations

Know your real raise. If you got a 3% raise but inflation was 5%, you took a 2% pay cut.

When negotiating:

"Cost of living adjustment" should be your baseline, not your raise
Your actual raise is everything above inflation

Saving for Big Purchases

Inflation erodes your savings goal. If you're saving for a $30,000 car in 3 years, that car might cost $33,000 by then.

Options:

Save more than you think you need
Put savings in high-yield accounts or short-term investments
Buy sooner if inflation is high (before prices rise more)

Quick Reference

What Causes Inflation