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How the United States and other countries experience inflation

How does inflation affect a country's well-being? What are some examples of high and low inflation?

Key points

  • In the US economy, the annual inflation rate in the last two decades has typically been around 2% to 4%.
  • The periods of highest inflation in the United States in the 20th century occurred during the years after World Wars I and II and in the 1970s. The period of lowest inflation—actually, deflation—was the Great Depression of the 1930s.
  • Deflation is negative inflation; during deflation, most prices in the economy are falling.
  • Hyperinflation is an outburst of high inflation that is often seen—although not exclusively seen—when economies shift from a controlled economy to a market-oriented economy.

How the United States and other countries experience inflation

In the last three decades, inflation has been relatively low in the US economy, with the Consumer Price Index typically rising 2% to 4% per year. Looking back over the 20th century, there have been several periods where inflation caused the price level to rise at double-digit rates, but nothing has come close to hyperinflation—an outburst of high inflation that is often seen when economies shift from a controlled economy to a market-oriented economy.

Historical inflation in the US economy

Diagram A below shows the level of prices in the Consumer Price Index, or CPI, stretching back to 1913. In this diagram, the base years—when the CPI is defined as 100—are set for the average level of prices that existed from 1982 to 1984. Diagram B below shows the annual percentage changes in the CPI over time, which is the inflation rate.
Graph A shows the trends in the US price level from the year 1916 to 2014. In 1916, the graph starts out close to 10, comma, r, i, s, e, s, t, o, a, r, o, u, n, d20 in 1920, stays around 16, o, r17 until 1931, then jumps to around 15, point, I, t, g, r, a, d, u, a, l, l, y, i, n, c, r, e, a, s, e, s, comma, w, i, t, h, p, e, r, i, o, d, i, c, d, i, p, s, comma, u, n, t, i, l, 2014, comma, w, h, e, n, i, t, i, s, a, r, o, u, n, d236. Graph B shows the trends in US inflation rates from the year 1916 to 2014. In 1916, the graph starts out at 7.7%, jumps to close to 18% in 1917, drops drastically to close to –11% in 1921, then goes up and down periodically until settling to around 1.5% in 2014.
Image credit: Figure 1 in "How the U.S. and Other Countries Experience Inflation" by OpenStaxCollege, CC BY 4.0
Let's take a closer look at diagram B. The first two waves of inflation are easy to characterize in historical terms: they are right after World War I and World War II. However, there are also two periods of severe negative inflation—called deflation—in the early decades of the 20th century. One of these periods followed the deep recession of 1920–21 and the other was during the Great Depression of the 1930s.
Since inflation is a time when the buying power of money in terms of goods and services is reduced, deflation is a time when the buying power of money in terms of goods and services increases. For the period from 1900 to about 1960, the major inflations and deflations nearly balanced each other out, so average annual rate of inflation over these years was only about 1% per year. A third wave of more severe inflation arrived in the 1970s and departed in the early 1980s.
Times of recession or depression often seem to be times when the inflation rate is lower, as in the recession of 1920–1921, the Great Depression, the recession of 1980–1982, and the Great Recession in 2008–2009. There were a few months in 2009 that were deflationary, but not at an annual rate.
Recessions are typically accompanied by higher levels of unemployment, and the total demand for goods falls, pulling the price level down. Conversely, the rate of inflation often—but not always—seems to start moving up when the economy is growing very strongly, for example immediately after wartime.

Inflation around the world

Around the rest of the world, the pattern of inflation has been very mixed, as can be seen in the graph below, which shows inflation rates over the last several decades. Many industrialized countries—not just the United States—had relatively high inflation rates in the 1970s. For example, in 1975, Japan’s inflation rate was over 8%, and the inflation rate for the United Kingdom was almost 25%. In the 1980s, inflation rates came down in the United States and in Europe and have largely stayed down.
Countries with relatively low inflation rates, 1960–2014
The graph shows that the United States, Japan, Germany, and the United Kingdom all had periods of high inflation in the 1970s and early 1980s, though Germany did not have nearly the high rates of inflation as seen in the other countries.
Since the early 1990s, all four countries have had inflation rates below 5%, with Japan’s rate consistently lower than those of Germany, the United Kingdom, and the United States. However, the graph also shows that, as of 2014, Japan had the highest inflation rate of the four.
Image credit: Figure 2 in "How the U.S. and Other Countries Experience Inflation" by OpenStaxCollege, CC BY 4.0
Countries with controlled economies in the 1970s—like the Soviet Union and China—historically had very low rates of measured inflation because prices were forbidden to rise by law, except for cases where the government deemed a price increase to be due to quality improvements. However, these countries also had perpetual shortages of goods since forbidding prices to rise acts like a price ceiling and creates a situation where quantity demanded often exceeds quantity supplied.
As Russia and China made a transition toward more market-oriented economies, they also experienced outbursts of inflation, although the statistics for these economies should be regarded as somewhat shakier. Inflation in China averaged about 10% per year for much of the 1980s and early 1990s, although it has dropped off since then. Russia experienced hyperinflation—an outburst of high inflation—of 2,500% per year in the early 1990s, although by 2006 Russia’s consumer price inflation had dipped below 10% per year, as shown in the graphs below.
The closest the United States has ever gotten to hyperinflation was during the Civil War, 1860–1865, in the Confederate states.
Countries with relatively high inflation rates, 1980–2013
The first graph shows that Brazil had an extremely high inflation rate—over 2000%—in 1990. The second graph, which is on a smaller scale, shows that Russia had a spike in its inflation rate in the late 1990s. Though Russia's rates have all been lower over the last decade, they are still relatively high rates.
Image credit: Figure 3 in "How the U.S. and Other Countries Experience Inflation" by OpenStaxCollege, CC BY 4.0
Many countries in Latin America experienced raging hyperinflation during the 1980s and early 1990s, with inflation rates often well above 100% per year. In 1990, for example, both Brazil and Argentina saw inflation climb above 2000%. Certain countries in Africa also experienced extremely high rates of inflation, sometimes bordering on hyperinflation, in the 1990s. Nigeria, the most populous country in Africa, had an inflation rate of 75% in 1995.
In the early 2000s, the problem of inflation appears to have diminished for most countries, at least in comparison to the worst times of recent decades. But the memory of double-digit, triple-digit, and even quadruple-digit inflation is not very far in the past for many countries.

Summary

  • In the US economy, the annual inflation rate in the last two decades has typically been around 2% to 4%.
  • The periods of highest inflation in the United States in the 20th century occurred during the years after World Wars I and II and in the 1970s. The period of lowest inflation—actually, deflation—was the Great Depression of the 1930s.
  • Deflation is negative inflation; during deflation, most prices in the economy are falling.
  • Hyperinflation is an outburst of high inflation that is often seen—although not exclusively seen—when economies shift from a controlled economy to a market-oriented economy.

Review questions

  • What has been a typical range of inflation in the US economy during the last decade or so?
  • Over the last century, during what periods was the US inflation rate highest and lowest?
  • What is deflation?

Critical-thinking question

Why do you think the United States' experience with inflation over the last 50 years has been so much milder than that of many other countries?

Problem

Within one or two percentage points, what has the US inflation rate been during the last 20 years? Draw a graph to show the data.

Want to join the conversation?

  • primosaur sapling style avatar for user Steven Maloney
    Is it correct to say that the periods of inflation for WWI and WWII described in Diagram B were caused by a shortage of products being available on the shelves in stores and lack of service due to workers fighting in the war?

    Also, why do controlled economies that change to a market system end up experiencing high levels of inflation? Is it because the consumer demand and ability to supply products remains unchanged, but now has a different pricing system associated to it?
    (8 votes)
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    • ohnoes default style avatar for user Tejas
      Yes. One of the reasons WWI and WWII had high inflation rates was because the government was using more resources for the war effort. Those resources, therefore, could not be used for consumer products. That resulted in large price increases. Of course, that isn't the only reason. Another reason for the inflation was because the government was printing a more money to fund the war effort.

      The reason controlled economies have high inflation when they switch over to a market system is because in such economies, prices are forbidden to increase by law. The forces that lead to inflation are there, but the law blocks any increase in prices. When the laws blocking inflation are repealed, prices then need to catch up to where they should be.
      (13 votes)
  • mr pink red style avatar for user Kelly Higgins
    More of a comment than question. The U.S. dollar is widely used in international commerce as a sort of universal exchange medium. For example, all oil in the world market, regardless of national origin or purchaser nation, is priced in dollars. Because of this, many countries around the world step in and buy dollars to prop up its value at the first signs of high inflation, particularly big oil exporting nations, since a loss in confidence in the dollar's value could ultimately cost them dearly in all of their international oil sales. Before the Euro, Euro-dollars, U.S. dollars on deposit in European banks, were the main mechanism by which EU countries bought and sold to one another. Hence, they all had an interest in seeing their saved Euro-dollars keep a solid value. While it didn't come to pass, some people were worried that the launch of the Euro might trigger U.S. inflation as the dollar lost some of its price support.
    (4 votes)
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  • leafers seed style avatar for user Allan
    Review Question 1: 2-4%

    Review Question 2: The periods of highest inflation in the United States in the 20th century occurred during the years after World Wars I and II and in the 1970s.

    Review Question 3: Deflation is negative inflation; during deflation, most prices in the economy are falling.

    Critical-thinking Question 1: I think the United States' experience with inflation over the last 50 years has been so much milder than that of many other countries because it has always had a market-economy and more stable.
    (2 votes)
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  • leafers seed style avatar for user sagarmadha.247
    In the third paragraph of the sub-topic Inflation around the world, it has been given that Russia experienced 2500%. what are the implications of such high percentages in real times? To ask simply that, how does it feel like to stay in such a country with such high inflation rates?
    (2 votes)
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  • blobby green style avatar for user Jiusi Zhang
    In the summary section, it is said that the highest inflation in the United States in the 20th century occurred during the years after World Wars I and II and in the 1970s. But what is the variation of inflation during the World Wars? Was there a deflation maybe?
    (1 vote)
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  • blobby green style avatar for user Karen M. Rozier
    It seems to me that countries that chose to devalue their currency do so after experiencing hyperinflation. I seem to recall Mexico and Ghana had those problems. Is that discussed later in the course?
    (1 vote)
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  • blobby green style avatar for user somaliboy144
    over the last century during what periods was the u.s inlation rate highest and lowest
    (1 vote)
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