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What Is Inflation?
September 25, 2026 3 Minutes

What Is Inflation?

Learn what inflation is, how rising prices affect purchasing power and household budgets, and what demand-pull and cost-push inflation mean.

Summary

  • Inflation is the increase in prices over time, which reduces what each dollar can buy.
  • The Consumer Price Index (CPI) is one common way economists track changes in the cost of goods and services.
  • Inflation can result from stronger demand, higher production costs or limits on supply.
  • When prices rise faster than income, household budgets can feel the pressure.
  • Tracking current spending and adjusting your budget can help your respond as prices change.

Inflation affects everyday financial decisions because it changes how far your money goes. Understanding what drives inflation and how it affects purchasing power can help you make more informed choices about spending, saving and planning.

What Inflation Means

Prices do not stay the same forever. When the overall cost of goods and services rises, that increase is called inflation. As prices rise, each dollar buys less than it did before, so purchasing power decreases.

Economists often measure inflation with a price index such as the Consumer Price Index, or CPI. The CPI tracks changes in the cost of goods and services households purchase over time. Comparing those costs across periods helps show the rate at which prices are changing.

How Inflation Can Affect the Economy

Inflation is not automatically good or bad. Its effects depend in part on how quickly prices are changing and what else is happening in the economy.

When inflation is mild and steady

Mild, steady inflation can encourage people to make purchases rather than delay them if they expect prices to rise. Higher demand can lead businesses to increase production and hire workers, supporting economic activity.

Inflation can also reduce the risk of deflation, which is a sustained decline in prices. Although falling prices may sound beneficial, prolonged deflation can reduce demand, contribute to layoffs and decrease the amount of money moving through the economy.

When inflation puts pressure on households

Higher prices can make necessities such as housing, childcare and groceries more difficult to afford, especially when wages do not rise at the same pace. Households may need to reduce other spending as more of their income goes toward everyday expenses.

Reviewing your spending can make those changes easier to see. First Financial's Manage Money tools can help you track spending, set budget limits and monitor financial goals in one place.

What stagflation means

Stagflation describes a difficult combination of high inflation, high unemployment and slow or stagnant economic growth. In that environment, consumers may spend less while the purchasing power of available money continues to decline.

What Causes Inflation?

Two common explanations for rising prices involve changes in supply and demand: demand-pull inflation and cost-push inflation.

Demand-pull inflation

Demand-pull inflation occurs when demand for goods or services increases while available supply does not keep pace. When more people are competing for the same limited supply, prices can rise.

During the COVID-19 pandemic, for example, demand increased for products such as cleaning supplies, disinfectant and hand sanitizer. Shortages of some of those products contributed to higher prices.

Cost-push inflation

Cost-push inflation occurs when it becomes more expensive to produce or distribute goods and services, or when supply is constrained. Businesses may respond to those higher costs by raising prices.

Oil is one example. Conflicts or natural disasters can disrupt distribution and reduce available supply. Oil prices can then rise even when demand has not changed.

Adjusting Your Financial Plan for Higher Prices

Inflation is a normal part of changing economic conditions, but rising prices can still create real pressure on a household budget. One practical response is to compare what you are actually spending today with the amounts in your current budget and make adjustments where needed.

If higher costs have changed how much you can set aside, review your current savings goals and decide whether the amount, timing or priority needs to change. First Financial's Personal Savings options can help you explore ways to save based on your goals.

Inflation can also affect longer-term planning because future dollars may not have the same purchasing power they have today. If you are evaluating retirement or other long-term goals, consider how changing costs fit into the broader plan and whether professional guidance would be useful.