What Is Inflation?

What inflation actually is

Inflation is the gradual increase in the prices of goods and services across an economy. When economists say “inflation was 3.3% last month,” they mean the average basket of stuff Americans buy cost 3.3% more in March 2026 than it did in March 2025.

Two things to be clear about up front. First, inflation isn’t one specific price going up — it’s the broad average across the economy. Eggs can spike because of a bird-flu outbreak without that being inflation; inflation is when most things rise together over time. Second, the dollar in your pocket is the other side of the same coin. When prices go up, each dollar buys less. Economists call this loss of purchasing power.

A useful way to picture it: in 1980, the U.S. federal minimum wage was $3.10 an hour, and a gallon of gas cost about $1.20. The wage hasn’t kept up with prices the way it once did, and that gap is what inflation, compounded over four decades, looks like in real life.

How inflation is measured

The most-watched measure of U.S. inflation is the Consumer Price Index (CPI), produced monthly by the Bureau of Labor Statistics. Here’s how it actually works:

• BLS price-checkers collect roughly 80,000 prices each month from about 22,000 retail stores and 6,000 housing units across 75 urban areas.
• Those prices get bundled into a “market basket” representing what a typical urban household actually buys — food, housing, energy, transportation, medical care, and so on.
• Each category is weighted by how much of a household’s budget it consumes. Housing is roughly a third of the index. A $200 jump in monthly rent moves CPI more than a $200 jump in dental work, because rent is a much bigger slice of most people’s spending.
• BLS then compares the basket’s total price to the same basket’s price a year earlier. The percent change is the inflation rate.

The CPI you see in headlines is technically called CPI-U — the U is for “urban consumers,” which covers about 93% of the U.S. population.

There’s also a core CPI, which strips out food and energy because those two categories swing wildly month to month and can mislead about underlying trends. Core CPI ran 2.6% in the year ending March 2026, meaningfully lower than the 3.3% headline number — because the recent spike was almost entirely energy-driven.

The Federal Reserve actually prefers a different measure called PCE (Personal Consumption Expenditures). It tracks similar stuff but adjusts faster when consumers shift their spending. The Fed targets 2% PCE inflation over the long run — they made that target official in January 2012. Most economists treat PCE and CPI as telling roughly the same story; CPI just gets the headlines because it’s released first.

What causes inflation

Two textbook answers, both useful:

Demand-pull inflation happens when buyers want more stuff than the economy can produce. Picture a hot housing market — buyers bid prices up because supply hasn’t caught up. Wages rising faster than productivity can fuel this too: if everyone has more to spend, prices rise to meet the demand.

Cost-push inflation happens when the cost of making things goes up and producers pass it through. The clearest example is energy. When oil spikes, fuel costs ripple through trucking, manufacturing, and food production within weeks. The March 2026 inflation jump from 2.4% to 3.3% was almost entirely energy-driven: in that single month, gasoline prices rose 21.2%, accounting for nearly three-quarters of the headline increase. Shelter, food, and core goods stayed close to where they’d been. (Statistics in this section reflect the BLS Consumer Price Index release published April 10, 2026, covering March 2026 data. The next release, covering April 2026, is scheduled for May 12, 2026.)

There’s a third cause economists keep returning to: expectations. If businesses and workers believe prices will rise 5% next year, workers ask for 5% raises, businesses bake 5% into their prices, and the prediction makes itself come true. This is one reason the Fed talks so much about “anchoring inflation expectations” — managing what people believe is half the job.

Try the calculator

Enter a dollar amount and two years to see how purchasing power has changed. Data is U.S. CPI-U annual averages from the Bureau of Labor Statistics, 1970 through 2025. A 2026 annual average won’t be available until early 2027 (the year has to finish first), which is why the picker caps at 2025.

What inflation means if you’re financing equipment

This is the part that matters if you run a business. Inflation hits equipment buyers in three places at once.

Equipment itself gets more expensive

From 2021 through 2024, we saw equipment prices in many categories rise roughly 30% to 40% above pre-pandemic norms. CNC machines, construction fleets, commercial printing presses, medical imaging — the whole catalog moved up. Some of that was supply-chain disruption; some was raw-material costs working their way through to finished goods. None of it has fully reversed.

Interest rates rise to fight inflation

When the Fed raises the federal funds rate to cool the economy, every other rate — including equipment financing rates — climbs with it. So the same equipment costs more and the financing on it costs more. We saw both happen at once between 2022 and 2024. The combined effect pushed monthly payments on otherwise similar deals up roughly 40% to 50% compared with an identical-spec purchase two years earlier.

The dollars you pay back are worth less than the dollars you borrowed

This one cuts in your favor. When you finance $100,000 of equipment over five years at a fixed rate, you lock in the nominal payment on day one — but you pay it back over time with dollars whose purchasing power is steadily eroding. At 3% annual inflation, a dollar paid in year five is worth about 86 cents in today’s purchasing power; a dollar paid in year three is worth about 92 cents. Across the whole five-year payment stream, you’re handing the bank back cheaper money than you borrowed. This is why fixed-rate, fixed-payment equipment financing tends to look smarter in inflationary periods than sitting on cash and waiting to pay the full price later.

The math on “buy now or wait” is rarely a simple call. A general rule worth knowing: if you genuinely need the equipment to generate revenue, financing it during inflation often beats sitting on cash that’s losing value while equipment prices keep climbing. But “genuinely need” is doing a lot of work in that sentence — buying equipment you don’t actually have demand for is expensive in any economic environment.

Two tools worth knowing about: the equipment lease calculator lets you model monthly payments on different structures, and the Section 179 page explains how current-year tax deduction can offset equipment costs — a real factor in the “buy now or wait” math.

A worked example: buy now vs. wait 12 months

To make this less abstract, take a $100,000 equipment purchase, 60-month financing, at rates around where we’re currently writing deals in April 2026 — call it 8% for a well-qualified small business. Four scenarios, same equipment, different timing and rate assumptions:

• Buy today. Monthly payment is roughly $2,028. Total paid over five years: about $121,700.
• Wait 12 months. Prices rise 3%. Rates hold at 8%. Equipment now costs $103,000. Monthly climbs to about $2,088. Total: $125,300 — that’s $3,600 more in nominal dollars, or about $2,400 more after adjusting for the year of inflation.
• Wait 12 months. Prices rise 3%. Rates drop to 6%. The math flips. Monthly drops to $1,991. Total: $119,500. Waiting saved you roughly $2,200.
• Wait 12 months. Prices rise 3%. Rates rise to 10%. Monthly jumps to $2,188. Total: $131,300 — nearly $10,000 more than buying today.

The point isn’t that one scenario is “right.” It’s that the “buy now vs. wait” question isn’t really about inflation alone — it’s about where you think rates are headed. If rates are likely to fall, patience can pay. If rates look flat or rising, locking in today’s fixed payment at today’s rate is usually the stronger call, and inflation working against prices while you wait only makes waiting worse.

One practical note from what I see on the equipment-finance side: equipment-loan pricing often lags Fed moves and tends to adjust in smaller increments — depending on the benchmark rate used, a borrower’s credit profile, collateral, term, and the broader market at the time. Worth factoring in before you treat a Fed rate cut as a reason to wait.

What inflation means for everyone else

Even outside business decisions, inflation touches three things most people care about:

• Savings. Money sitting in a checking account earning 0.1% loses purchasing power in any year inflation runs higher than 0.1% — which is essentially every year. This is why financial planners are constantly pushing people to invest rather than hold cash.
• Wages. “Real” wages mean wages adjusted for inflation. A 4% raise in a year of 3% inflation is a 1% real raise. If your pay rises slower than prices, you’re effectively taking a pay cut.
• Borrowing. Inflation favors borrowers and hurts lenders, for the same reason it favors equipment buyers — the dollars used to repay the loan are worth less than the dollars borrowed. This is part of why economists often describe a fixed-rate mortgage as a hedge against inflation.