Inflation is one of those phenomena that everybody feels, but few can see coming. It shows up in grocery bills, rent payments, and the realization that a dollar stretches less than it used to. When paychecks fall behind, the squeeze tightens.
But price increases don’t affect everyone in quite the same way. James McCafferty, director of Western Washington University’s Center for Economic and Business Research, helps explain what inflation really means, why prices don’t always move together, and how it affects everyday finances.
What Is Inflation?
McCafferty offers a two-part inflation definition: “Inflation is an increase in the price of goods and services overall—not just an increase in a specific good.” A jump in gas prices, for example, can push the inflation rate higher even as other prices hold steady. The reverse holds, too: gas prices can fall while other costs keep climbing, he says.
Prices can move in tandem or in opposite directions. A big-screen television can get cheaper as technology improves. In September, television prices fell 1.9% year over year, according to the Bureau of Labor Statistics (BLS).
Grocery prices, meanwhile, can rise or fall for entirely different reasons, such as a freeze that damages crops. Inflation measures where the whole basket lands.
Then there’s purchasing power, or how much a dollar buys. After a year of 3.7% inflation, a basket of everyday goods that cost $100 a year ago would now run about $103.70. That shows up in a household’s finances.
“Inflation erodes the value of a steady paycheck or savings account,” McCafferty says. To keep pace, income needs to rise with prices, and savings need to earn at least the inflation rate.
Inflation Is Relative
Closely related to inflation is the cost of living. Think of it as inflation’s cousin: the total a household pays for housing, groceries, fuel, and more. The cost of living is a snapshot of what a household pays at a given moment. Inflation is the motion: how prices change over time.
Two families living just blocks apart can face very different expenses. Both hear the same national inflation rate, yet their monthly bills tell different stories.
Beef and veal prices rose 3.5% over the past year, according to the BLS. One household may feel the sting at every grocery run, while the vegetarian family down the street barely notices.
How Is Inflation Measured?
Inflation is tracked by price indices; each one follows the cost of a set basket of goods and services and reports how that cost changes. The best known is the Consumer Price Index (CPI), which the BLS publishes monthly.
The CPI, which tracks price movements for goods and services, rose 3.7% in the year through September 2026, according to the BLS. That 3.7% is the headline rate, the figure that moves markets and shapes how Americans feel about the economy.
Economists watch two versions. Headline CPI, the 3.7% figure, covers everything. Core CPI sets food and energy aside, and for good reasons. “Food and energy are notoriously volatile… going up sharply in one period, but not the next,” McCafferty says.
Gas can spike one month and ease the next, and a freeze can send grocery prices up for a season. Setting those swings aside reveals the broader force underneath. Core CPI rose 2.6% over the past year.
According to the BLS, price indices reflect consumer expenditures across eight separate categories: food and beverages, housing, apparel, transportation, medical care, recreation, education/communications, and other goods and services. But it’s not one size fits all.
“Not everyone buys that bundle, so it can over- or understate inflation compared to what different households experience,” McCafferty says.
The Federal Reserve uses a different gauge to set its 2% target: the personal consumption expenditures price index, or PCE. PCE tracks a wider range of spending and adjusts as shoppers change their buying habits.
Location matters, too. Seattle-area prices rose 4.4% from August 2025 to August 2026, a full percentage point above the 3.4% U.S. city average, according to BLS data.
McCafferty points to forces specific to the region. When less cargo arrives by sea at the Port of Seattle, more goods travel by rail or truck, which costs more.
What Causes Inflation?
To better manage price volatility, it helps to understand what causes inflation. Most inflation traces back to three forces:
- Strong demand. Buyers want more goods and services than the economy can produce.
- Rising costs. Making and moving goods gets more expensive, and businesses pass those costs on.
- Easy credit. Cheap borrowing fuels spending.
The Federal Reserve manages credit through interest rates. It raised its benchmark rate to a range of 3.75% to 4% in September 2026.
For a long stretch, freer trade and the open exchange of goods, services, and ideas helped keep inflation low, McCafferty says. The pandemic upended that, as ports shut down and trucking slowed. Inflation cooled, then a new round of shocks arrived.
In the current economy, McCafferty points to three: tariffs that raise the cost of trade, geopolitical tensions that have pushed oil prices higher, and massive spending on artificial intelligence.
The AI boom works on the demand side. Tech companies are pouring money into data centers, which compete with households and other businesses for electricity, construction crews, equipment, and materials. When many buyers chase the same resources, prices climb.
McCafferty doesn’t expect the disruptions to ease anytime soon as businesses rework and shorten their supply chains. “It seems like a higher degree of volatility is our new normal,” he says.
Inflation Examples
Sticker shock at the gas pump or the grocery store is often inflation at work. Real-life inflation examples help to illustrate this point. Filling the tank costs 34.2% more than a year ago, according to the BLS. A flight home for the holidays runs 22.4% higher. The morning pot of coffee costs 7.1% more. The electric bill is up 4.4%, and rent has climbed 2.8%.
McCafferty points out that when it comes to inflation, perception can matter almost as much as the numbers themselves. Gas prices are the prime example. Stations post them in large figures at intersections everywhere.
“They have an outsized influence on how we think of things, even if that $0.10 increase doesn’t actually cost that much,” he says. Grocery prices work the same way, since shoppers see them every week. Meanwhile, a television that got cheaper could slip by unnoticed.
A grocery store might sell a pie for $5 when shoppers expect to pay $6 or $7. The store loses money on the pie, but it bets customers will fill their carts with higher-margin items. Those bargains make prices feel lower than they really are.
“Prices are sticky,” McCafferty says. Retailers raise prices quickly when the cost of inputs, from oil to aluminum, climbs, and cut them slowly when those costs ease.
More often, a price holds steady while income and other costs rise. “That means the relative price falls even if the actual ‘menu price’ or ‘sticker price’ stays the same for a while,” he says.
Why Inflation Matters
Nearly every financial decision rests on assumptions about future prices. When prices behave as expected, plans work. When inflation surprises, the effects ripple from Washington to the kitchen table.
The Federal Reserve aims for low, predictable inflation for exactly that reason, McCafferty says. Steady prices let employers set wage contracts and let families plan ahead. The Fed’s target is 2%. Inflation has run above it for more than five years.
Borrowers feel the strain. More drivers are falling behind on car loans, McCafferty says, a sign that some households are under real pressure, though delinquency rates remain moderate. Many consumers are taking on less debt while lining up more available credit, in case a lost job makes borrowing harder later.
Corporate America feels uncertainty, too. Policies that keep changing make it hard to commit to long-term plans or lock in costs, he says.
Households sit at the end of that chain. A family that budgeted for 2.5% inflation and got 3.7% feels that pinch at every checkout, McCafferty says. People on fixed incomes, such as retirees, can take the hardest hit.
All that unpredictability adds up. “Part of the affordability story is an insecurity story,” McCafferty says.
Is Inflation Always Bad?
While inflation is often portrayed as the economic enemy, it is a necessary evil. McCafferty explained why zero inflation would carry its own risk. “If there was no inflation at all, downward pressure on prices would cause deflation… and if everyone thinks the price of ‘stuff’ will be lower tomorrow than today, they wait,” he says, adding that then everything stops: “You can get a lot of problems with a deflationary spiral.”
“So, economists often think a little inflation is safer than none at all,” McCafferty says. “They also want that little bit of inflation to be steady and predictable so everyone can plan for it.”
Inflation may operate invisibly, but its effects land in every budget. Knowing how it works, and how your own costs compare with the national number, puts you in a stronger position to prepare for the unknown.
