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What Is Inflation? A Simple Explanation, and the 2,000-Year Story of Who 'Invented' It

What is inflation?

Inflation is the general rise in prices across an economy over time. When prices go up, each dollar in your pocket buys a little less. Economists call that a loss of purchasing power.

A simple example. Say a basket of groceries costs $100 today:

Flip it around and you see the damage to savings. At 3% inflation, $100 sitting in a drawer buys only about $74 worth of groceries after 10 years.

Inflation is usually reported as a yearly percentage. In the United States, prices were 3.7% higher in September 2026 than a year earlier. See our report on the September CPI.

Inflation, deflation and the other "-flations"

What causes inflation?

Economists group the causes into three types:

1. Demand-pull inflation. Everyone wants to buy more than the economy can produce. Sellers raise prices because they can. This happened after the pandemic, when savings and stimulus met empty shelves.
2. Cost-push inflation. It costs more to make things, so prices rise. Oil is the classic example. When crude jumps, fuel, airfares, shipping and plastics all follow. That's what drove 2026's rise.
3. Built-in inflation. Once people expect prices to rise, workers ask for raises and businesses raise prices in advance. Expectations feed on themselves. Central banks fear this one most.

Behind all three sits one old idea: when the amount of money grows faster than the amount of stuff to buy, each unit of money is worth less. That idea is the key to the history.

Who invented inflation? Nobody, but here's who caused it first

Inflation wasn't invented like the light bulb. It was discovered, the hard way, over and over, by people and governments who created too much money. Here's the 2,000-year story.

Ancient Rome: shaving the silver (1st to 3rd century AD)

Rome paid its soldiers and officials in silver coins called denarii. Under Emperor Augustus, around the year 1 AD, the denarius was nearly pure silver.

Then emperors found a shortcut. When they needed more money for armies and building, they mixed cheaper metals into the coins. Nero began cutting the silver around 64 AD. Over the next two centuries the cuts kept coming. By the 270s, Rome's main silver coin contained only a few percent silver.

People noticed. Merchants raised prices for the "new" coins. Prices across the empire soared in the third century.

In 301 AD, Emperor Diocletian tried to fix it by law. His Edict on Maximum Prices set price caps on more than a thousand goods and wages, with the death penalty for breaking them. It failed. Goods vanished from markets, and the law was soon ignored. It is one of history's first lessons that you can't legislate inflation away.

China: the first paper-money inflation (11th to 14th century)

China invented paper money. Merchants in Sichuan used paper notes called jiaozi in the early 1000s, and the government soon took over printing them.

Paper money is wonderfully convenient. It's also dangerously easy to print. Under the Yuan dynasty, founded by Kublai Khan, the government printed more and more notes to pay its bills. By the mid-1300s the notes had lost most of their value. The following Ming dynasty eventually gave up on paper money and returned to silver.

Europe's "Price Revolution" (16th century)

After 1545, Spain began shipping enormous amounts of silver from the mines of Potosí in today's Bolivia. Europe suddenly had far more money, but not far more goods.

Prices across Europe rose for about 150 years. In some countries they rose roughly sixfold. That works out to only 1% to 2% a year, which sounds small today but was shocking to people used to stable prices for generations.

The first people to explain it

This is where inflation gets its first "inventors", the thinkers who worked out why it happens:

• Nicolaus Copernicus, the Polish astronomer who put the Sun at the centre of the solar system, also wrote an essay on money in 1526. He noted that money loses value when there's too much of it. It was one of the earliest statements of the idea.
• Martín de Azpilcueta, a Spanish priest of the School of Salamanca, linked the flood of American silver to rising prices in 1556.
• Jean Bodin, a French philosopher, made the same argument in 1568. Historians often credit him with an early version of the quantity theory of money.
• David Hume, the Scottish philosopher, explained in 1752 how new money spreads through an economy and pushes up prices.
• Irving Fisher, an American economist, wrote it as an equation in 1911: MV = PT. Money times how fast it circulates equals prices times the number of transactions. More money, same goods, higher prices.
• Milton Friedman summed it up in the 20th century: inflation is "always and everywhere a monetary phenomenon."

America's early inflations

• The Revolutionary War (1770s–1780s). The Continental Congress printed so much paper money, the "Continental", that it became nearly worthless. The phrase "not worth a Continental" survived for generations.
• The world's first inflation-protected bonds (1780). Massachusetts paid its soldiers with notes whose value was tied to the price of a basket of corn, beef, wool and leather, so inflation couldn't erode their pay. It was an early ancestor of today's TIPS.
• The Civil War (1860s). The Union printed "greenbacks" and the Confederacy printed so much money that Southern prices soared to many times their pre-war level.

Where the word "inflation" came from

The word comes from the Latin inflare, "to blow into" or "puff up", the same root as inflating a balloon.

By the mid-1800s, Americans were using it for money, in phrases like "inflation of the currency". At first it meant an increase in the amount of paper money, like blowing air into a balloon. Only over the 20th century did "inflation" come to mean what most people mean today: rising prices, the result rather than the cause.

How inflation is measured

Before anyone could fight inflation, someone had to measure it.

• 1707: English bishop William Fleetwood compared the prices of wheat, beer, cloth and other goods over centuries, to work out what an old sum of money was worth in his day. It's often called one of the first price indexes.
• 1913 to 1919: The US Bureau of Labor Statistics began publishing a cost-of-living index during the First World War, when wartime prices were climbing. Its national figures reach back to 1913. That index became the Consumer Price Index (CPI).

Today the BLS collects about 80,000 prices every month for the CPI basket, from rent and groceries to airfares and haircuts, and is published every month. Canada's equivalent comes from Statistics Canada, and most countries have one.

Economists also watch core inflation, which leaves out food and energy because they swing so much. In September 2026, US headline inflation was 3.7% but core was only 2.6%, because most of the jump came from gasoline.

Inflation's most famous disasters

The US "Great Inflation" of 1965 to 1982 ended only when Fed Chair Paul Volcker raised interest rates to near 20% in 1981, causing a deep recession. It taught central banks that once inflation gets built into expectations, it's very painful to remove.

The modern answer: the 2% target

After the 1970s, central banks looked for a better rule. New Zealand adopted the world's first formal inflation target in 1990. Canada followed in 1991, and today the Bank of Canada aims for 2%. The US Federal Reserve formally adopted a 2% target in 2012.

Why 2% and not zero?

• A safety buffer against deflation. Falling prices sound nice, but they make people delay purchases and make debts harder to repay. Japan spent years stuck in deflation.
• Room to cut rates. With some inflation, interest rates sit high enough that the central bank can cut them in a recession.
• Measurement isn't perfect. Official indexes may slightly overstate true inflation, because products improve over time.

Central banks fight inflation mainly by raising interest rates. Higher rates make borrowing more expensive, which cools spending and, eventually, prices. That's why the Fed raised rates in September 2026.

What inflation means for your money

Inflation is the silent tax on savings. Here's how different places to keep money have held up against it:

The key idea is your real return: what you earn after inflation. A 5% return with 3.7% inflation is only about a 1.3% real gain. Our guide on what inflation does to compound growth runs the numbers.

Five ways to protect yourself from inflation

1. Don't hold too much cash. Keep an emergency fund, then put the rest to work. See whether your savings account is losing money.
2. Earn a real rate on cash. T-bills, money market funds and the best high-yield accounts pay more than they used to. Here's how to buy Treasury bills.
3. Own stocks for the long term. Companies can raise their prices, so their profits tend to grow with inflation over time. A low-cost index fund is the simplest way. Start with what an ETF is.
4. Consider inflation-linked bonds for part of your safe money.
5. Use the Rule of 72. Divide 72 by the inflation rate to see how fast prices double. At 3%, prices double in 24 years. At 3.7%, in under 20. That's how much your savings need to grow just to stand still.

The bottom line

Inflation isn't a modern invention. It's what happens whenever money grows faster than the things it buys, from Roman silver coins to Chinese paper notes to today's oil shock. What people invented over 2,000 years were the explanations, the word, the measurements and finally the 2% target that central banks use today.

For investors, the lesson hasn't changed since Diocletian: you can't stop inflation by wishing it away. You protect yourself by making sure your money earns more than prices rise.

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