Historical U.S. Inflation Rate by Year: 1929 to 2025

The U.S. inflation rate by year shows how much prices for goods and services rise year-over-year. The inflation rate typically reacts to phases of the business cycle, which is the natural cycle of expansion and contraction that the economy goes through over time. The Federal Reserve has a target annual inflation rate of 2%, and it uses monetary policy to keep inflation in check and stabilize the economy when inflation rises above that benchmark.

Key Takeaways

• The U.S. inflation rate shows the change in prices year-over-year.
• The inflation rate responds to different phases of the business cycle as the economy expands and contracts.
• The Federal Reserve uses monetary policy to control inflation and keep it at or near an annual target of 2%. 
• In 2022, inflation reached some of the highest levels seen since 1981, hitting 9.1% in the wake of the COVID-19 pandemic.
• The 12-month percentage change for inflation for December 2024 was 2.9%. 

What Is the Inflation Rate? 

The inflation rate is the percentage change in the price of products and services from one year to the next. Two of the most common ways to measure inflation are the Consumer Price Index (CPI) calculated by the Bureau of Labor Statistics (BLS) and the personal consumption expenditures (PCE) price index from the Bureau of Economic Analysis (BEA). The CPI measures the change in prices paid by U.S. consumers over time, and it is the most popular way to gauge inflation.

The year-over-year (YOY) inflation rate is calculated by subtracting the value of the CPI at the beginning of the year from the value at the end of the year. The result is then divided by the CPI value at the beginning of the year and then multiplied by 100 to get the inflation rate percentage. 

What Is the Current Inflation Rate?

For the month of December 2024, the inflation rate was 2.9%.

This means that CPI rose by 2.9% over the past 12 months before seasonal adjustment. The BLS calculates CPI on a monthly basis.

2.9%

The latest year-on-year inflation rate before seasonal adjustment as of December 2024.

Why the Inflation Rate Matters

The inflation rate indicates the overall health of a country’s economy. It is used by central banks, economists, and governments to determine what action needs to be taken, if any, to stabilize the economy and keep it healthy. 

Policymakers at the Fed generally believe that an inflation rate of 2% (or slightly below) is acceptable for a stable economy that is healthy for both consumers and businesses. If the inflation rate drops too low and prices fall over a sustained period, it could cause deflation.

Important

Deflation is the opposite of inflation. It occurs when consumers stop spending more money than necessary and put off buying big-ticket items in hopes that prices will fall even further.

The decrease in consumer spending, slowing business activity, and high unemployment that comes with deflation can have severe long-term effects on a country’s economy. 

Rapidly rising prices and high levels of inflation can also bode poorly for the economy, as these changes often outpace wages, making products and services more expensive for consumers. This is why most central banks and governments closely monitor the annual inflation rate to ensure it is at a balanced and modest level, around 2% to 3%. 

Historical U.S. Inflation Rates from 1929 to 2025

While the United States has experienced a relatively low and stable inflation rate since the 1980s, inflation hit record highs in 2021 and 2022 in the wake of the pandemic. The year-over-year inflation rate was 7.0% at the end of 2021 and 6.5% at the end of 2022. At the end of 2023, it was 3.4%. At the end of 2024, it was 2.9%.

The table below shows the year-over-year inflation rate in the U.S. from 1929 to 2024 based on December end-of-year data. It also compares that rate with the federal funds rate, the phase of the business cycle, the change in gross domestic product (GDP), and important events that might have influenced inflation.

*Annual percent change in GDP

The Importance of Business Cycles: Expansion and Contraction

The inflation rate often responds to different phases of the business cycle, or the natural expansion and contraction that economies undergo over time. The business cycle has four phases: expansion, peak, contraction, and trough.

Expansions and Peaks

During the expansion phase, the economy experiences rapid growth. Interest rates tend to be low, and economic indicators related to growth such as employment, wages, output, demand, and supply of goods and services are generally trending upward. The inflation rate is usually at the acceptable level of around 2%. 

When the economy hits the maximum level of growth, it’s known as the peak, which marks the end of expansion and the beginning of contraction. Prices are typically at their highest in the peak stage of the business cycle, and inflation is also high. At this point, the Federal Reserve raises interest rates to cool inflation and slow down the economy, which leads to contraction.

Contractions and Troughs 

In the contraction phase of the business cycle, prices fall, growth slows, and employment declines. If this period of contraction lasts long enough, it can lead to a recession, which could, in turn, lead to deflation.

As the economy continues to trend downward, it reaches the trough. This is the lowest point in the cycle, where prices bottom out before recovery and expansion begins again. Here, the inflation rate begins to rise and the cycle starts over. 

How the Federal Reserve Uses Monetary Policy to Control Inflation

The Federal Reserve uses monetary policy to control inflation as the economy goes through its cycle of expansion and contraction. The Fed focuses on the core inflation rate—which excludes food and energy prices since they are typically more volatile—to monitor inflation trends.

If the core inflation rate rises significantly above the Fed’s 2% target inflation rate, the Fed may tighten monetary policy to slow the economy by hiking the federal funds rate, or the rate at which banks lend to each other. Raising the fed funds rate influences interest rates and makes borrowing money more expensive for consumers and businesses.

Conversely, the Fed may decrease the discount rate—which is the interest rate for banks to borrow money from the Federal Reserve—to stimulate the economy and raise prices. A lower discount rate means that banks will lower the interest rate for customers as well, making it easier for consumers and businesses to borrow money. 

Other methods that the Federal Reserve may use to expand the economy include:

• Purchasing government securities
• Reducing the reserve requirement
• Engaging in open market operations, through which the Fed buys or sells U.S. Treasury securities on the open market

What Is a Healthy Inflation Rate?

The U.S. Federal Reserve pursues monetary policy to keep the annual rate of inflation close to around 2%, as do the central banks of many other countries. This rate is considered low and stable, without being so low that it may weaken the economy.

What Causes Inflation?

Numerous factors can drive inflation. Major contributors include increased production costs, higher demand, and fiscal and monetary policies pursued by governments or central banks.

What Is the Highest Inflation Rate in Modern U.S. History?

Since the introduction of the Consumer Price Index in 1913, the highest inflation rate observed in the United States was 23.7% in June 1920.

How Is Inflation Measured?

The Consumer Price Index from the Bureau of Labor Statistics is the most widely used measure of inflation. This index measures the change in prices based on a basket of goods and services over time. The inflation rate is calculated by subtracting the prior period’s CPI from the new period’s CPI and dividing the result by the prior period’s CPI. This figure is then multiplied by 100 to get the inflation rate.

The Bottom Line

The inflation rate is an important metric to measure the overall health of the economy, which is why it is closely monitored by the Federal Reserve, government officials, and economists. The U.S. central bank uses it to inform monetary policy and what decisions must be made to keep inflation as close to the 2% annual inflation target as possible, including fostering a stable economy with steady supply and demand.