From Then to Now: Inflation’s Effects Over 25 Years

Learn how inflation has transformed costs and impacted your finances

Fact checked by Vikki VelasquezReviewed by Katie MillerFact checked by Vikki VelasquezReviewed by Katie Miller

Inflation has been front and center in the news throughout the past few years. You’ve probably faced it head-on every time you’ve gone grocery shopping or bought a cup of coffee. According to the 2024 study from the Pew Research Center, 62% of Americans saw inflation as one of the country’s top problems.

While inflation may be painful for your wallet, it’s a relatively normal part of the economic cycle. In fact, experts like to see at least some inflation every year as evidence the economy is growing. It can be helpful to look at how inflation has changed throughout the past 25 years and how today’s inflation rates fit into the broader context.

Key Takeaways

• Inflation is the increase in the cost of goods and services, as measured by the Bureau of Labor Statistics using the Consumer Price Index.
• Inflation is generally the result of either supply-side or demand-side factors, but can also be caused by inflation expectations.
• Inflation has ebbed and flowed over the past 25 years, reaching its highest point in 2022 and its lowest point in 2009.
• The latest inflation data from the Bureau of Labor Statistics show that the current inflation rate is 3%, down from this time last year, the lowest rate since March 2021.
• Though it’s impossible to forecast inflation with absolute certainty, experts generally predict inflation will continue to ease.

Understanding Inflation

Inflation refers to the rise in the price of goods and services over time. In other words, when the latte you were once able to buy for $5 now costs $6, inflation is the culprit.

It’s measured using the Consumer Price Index (CPI), which tracks the average change of a consumer goods and services basket. It determines the overall average inflation rate and price changes for individual spending categories, such as groceries, health care, and more.

“Most often, inflation is measured yearly, answering the question: relative to the same period last year, how much has the price of the basket of goods and services changed?” said Sophia Kearney-Lederman, a senior economist with FHN Financial.

The Federal Reserve is responsible for managing inflation and targets an average annual inflation rate of around 2%. To achieve this, it employs monetary policy, such as adjusting interest rates, which has been used in recent years.

“Interest rate policy—setting the federal funds target rate—is the Federal Reserve’s preferred monetary policy tool,” said Kearney-Lederman. “When inflation is too high or rising too quickly, the Federal Reserve can increase the fed funds target, which makes borrowing more expensive, which in turn slows demand for goods and services, pulling demand down to better align with supply.”

On the other hand, if the economy is growing too slowly, the Fed might lower rates to encourage consumer spending.

What Factors Influence Inflation?

Inflation can usually be divided into two key categories based on its cause: demand-pull inflation and cost-push inflation.

Demand-pull inflation occurs when the demand for products and services exceeds the supply. For example, if 100 people are shopping for homes but only 50 homes are available, the price of those homes will naturally rise. Ryan Jacobs of Jacobs Investment Management states this is “often due to increased consumer spending, government expenditure, or investment.

Cost-push inflation, on the other hand, results from an increase in the cost of production or disruptions to the supply chain. For example, after 2020, a labor shortage led to increased wages, while simultaneously, a disrupted supply chain pushed production costs up.

“Inflation expectations also play a crucial role. If people expect prices to rise, they may spend more now, which can drive prices up further,” said Jacobs.

Historical Overview of Inflation Rates (1999-Today)

Economists and news sources often cite price inflation as an average rate over a specific period. But when you zoom out and look at the big picture, you can see how inflation has ebbed and flowed over the years.

“The early 2000s experienced moderate inflation, but the financial crisis of 2007-2008 led to deflationary pressures, prompting central banks to adopt aggressive monetary policies,” said Jacobs. “The 2010s generally saw low inflation rates, but the COVID-19 pandemic and subsequent supply chain disruptions have caused significant inflationary spikes in recent years.”

For example, the United States experienced negative inflation—known as deflation—during 2009. It was the lowest inflation rate in the past two decades. On the other hand, the highest inflation happened throughout late 2021 and 2022.

Note

The highest historical inflation rate in the United States occurred in November 1918, when the price of goods and services increased by 20.7%. The country has never experienced hyperinflation, when inflation rises more than 50% per month.

Inflation also doesn’t occur evenly across all spending categories. Let’s break down a few common spending categories to see how their price increases compare to the overall average inflation rate.

Housing Costs

The cost of housing has increased significantly higher than goods and services overall. The cumulative rate of inflation from 1999 to 2023 was about 83%. Meanwhile, housing prices increased by nearly 166% in the same period.

College Tuition

Like housing, the price of higher education has also grown considerably more than the overall inflation rate over the past 25 years. The cumulative inflation rate between 1998 and 2023 for all undergraduate institutions, public and private, four-year and two-year, was 175%. The impact was most significant for public universities, which saw price hikes of 187% compared to the 155% increase in private schools.

Gas

The price of gas gets a lot of attention in the news, but it’s not reflective of average inflation. The price of gas tends to be far more erratic than inflation overall. Over the past two decades, it has had periods of extreme inflation, while also going through periods of extreme deflation, including periods when overall inflation is rising. Gas price inflation has increased an average of 6.96% per year over the past 25 years (January 1999 through July 2024, the latest data available as of publication), while the average overall inflation rate was just 2.54% per year for the same period.

TV

Consumer electronic goods such as televisions have trended opposite to most goods and services. For example, a TV that cost $500 in 1999 would cost closer to $10 in 2024. TV prices have experienced negative inflation of an average of 14.52% per year since 1999. Of course, the TVs we purchase today are far more expensive than that, but they haven’t risen with inflation, even when you account for the major technological advancements.

Minimum Wage

The minimum wage is one part of the economy where inflation has been notably absent. It sat at $5.15 from 1997 to 2007, when it increased to $5.85. It increased again to $6.55 in 2008 and $7.25 in 2009, which has remained since. For the minimum wage to have kept pace with inflation since 1999, it would need to be $9.86 today.

Vehicles

If you tried to buy a car during the pandemic, you probably noticed how dramatically vehicle prices increased. For example, used vehicle prices in February 2022 were about 41% higher than just one year earlier. New vehicle prices rose more than 12% in that same period. However, vehicle prices don’t usually rise so much year-to-year. They’ve actually decreased at several points throughout the past 20 years, including throughout early 2024.

Food

On average, annual inflation of food prices is about 2.8% since 1999. However, food away from home, such as restaurants, has increased in price more than groceries.

Plane Tickets

You might be surprised to learn that airline fares have risen slower than the prices of other goods and services. The average annual inflation rate for plane tickets has been just 1.3% since 1999.

Health Care

Consumer health-care costs have risen slightly more than the average inflation rate. While inflation over the past 25 years has been around 2.54% per year, health-care costs have risen by about 3.32%. What makes health-care spending unique, of course, is the uncertainty. You could spend almost nothing in one year and thousands the next year.

Clothing

The cost of clothing has risen surprisingly slowly compared to other goods and services. According to BLS data for the past 25 years, the average annual inflation rate for clothing was -0.03%. Unlike many goods and services, clothing has experienced several deflationary periods over the past two decades, meaning prices have fallen, at least temporarily.

Inflation Forecasting and Future Trends

It’s impossible to pinpoint future inflation accurately. Certainly, no one in 2019 knew we’d soon experience a global pandemic leading to extreme inflation. However, economists and other financial experts can still use some tools, including statistical models and economic indicators, to predict future trends.

According to Kearney-Lederman, forecasts predict inflation will continue to fall from its recent high levels.

“Consumer inflation peaked this cycle in the middle of 2022 and has since been slowing,” said Kearney-Lederman. “It is still running above the Fed’s 2% target, however recent progress in both the CPI and the PCE (Personal Consumption Expenditures) indices in May and June have put inflation back on track to continue to move down toward the Fed’s 2% target.

Coping With Inflation: Tips and Strategies

Inflation places pressure on household budgets, but there are steps you can take to cope with it. According to Jacobs, the best thing you can do is get a handle on your spending.

“Prioritizing essential purchases and cutting back on discretionary spending can help manage higher costs,” said Jacobs.

A hefty emergency fund can be invaluable during times of inflation. Not only can you dip into it if your costs exceed your income, but it’s also there for financial emergencies such as job loss, medical bills, or anything else that pops up.

If you’re saving and investing your extra money, look for those investments whose returns outpace inflation. The stock market has historically risen at a rate higher than inflation. Even a high-yield savings account can be a hedge against inflation. 

Frequently Asked Questions (FAQs)

How Does Inflation Affect Different Income Groups?

Inflation impacts low-income Americans more for a couple of different reasons. First, while high earners have seen their incomes keep pace with or exceed inflation, lower-earning Americans have seen theirs rise slower than inflation (or even fall). Additionally, low-income families spend more of their household income on goods and services than high-income families. As a result, an increase in groceries or gasoline is more impactful.

What Role Do Government Policies Play in Controlling Inflation?

The Federal Reserve is tasked with controlling inflation using monetary policy, primarily by raising and lowering interest rates. The legislature can also control inflation through fiscal policy, which includes taxes and spending initiatives.

Are There Any Sectors That Benefit From Inflation?

Inflation isn’t an inherently bad thing—the economy as a whole benefits from some level of inflation. Additionally, some individual sectors can benefit from above-average inflation. Most notably, individual consumers benefit when the price of labor—in other words, wages—increases, as well as the cost of their investments.

How Do Global Events Influence Inflation Rates?

Global events can influence inflation by creating cost-push inflation, where global events, including natural disasters, push up production costs or disrupt the global supply chain. This was one reason for the inflation that occurred during the COVID-19 pandemic.

How Much Has Inflation Gone Up in the Last 25 Years?

Cumulatively, inflation has increased 89% in the last 25 years, with an average annual increase of 2.54% per year. During that period, it reached as high as 9.1% in June 2022 and as low as -2.1% in July 2009.

The Bottom Line

Inflation has been at the top of Americans’ minds for the past several years, and there’s no doubt it can be painful for household budgets. However, a greater understanding of how inflation works and historical inflation rates can help you prepare not only for how it impacts your budget today but also for how it will affect your long-term financial planning.

Read the original article on Investopedia.