The U.S. inflation rate by year is the percentage of change in product and service prices from one year to the next, or year-over-year.

The inflation rate responds to each phase of the business cycle. That's the natural rise and fall of economic growth that occurs over time. The cycle corresponds to the highs and lows of a nation's gross domestic product (GDP). It measures all goods and services produced in the country.

Key Takeaways The U.S. inflation rate by year is how much prices change year-over-year.

Year-over-year inflation rates give a clearer picture of price changes than annual average inflation.

The Federal Reserve uses monetary policy to achieve its target rate of 2% inflation.

Inflation has been stable over the last couple of years thanks to better policy decisions and managing inflation expectations.

Business Cycle: Expansion and Peak

The business cycle runs in four phases. The first phase is the expansion phase. This is when economic growth is positive, with a healthy 2% rate of inflation. The Federal Reserve considers this an acceptable rate of inflation.﻿﻿

On August 27, 2020, the FOMC announced it will allow a target inflation rate of more than 2% if that will help ensure maximum employment. It still seeks a 2% inflation over time but is willing to allow higher rates if inflation has been low for a while.﻿﻿

As the economy expands past a 3% rate of growth, it can create an asset bubble. That's when the market value of an asset increases more rapidly than its underlying real value.

The second phase of the cycle is known as the peak. This is the time when expansion ends and contraction begins.

Business Cycle Phases.

Business Cycle: Contraction and Trough

As the market resists any higher prices, a decline begins. This is the beginning of the third, or contraction, phase. The growth rate turns negative. If it lasts long enough, it can create a recession.

During a recession, deflation can occur. That's a decrease in the prices of goods and services. It can often be more dangerous than inflation.

As the economy continues its downward trend, it reaches the lowest level possible for the circumstances. This trough is the fourth phase, where contraction ends and economic expansion begins. The rate of inflation begins to increase again, and the cycle repeats.

During recessions and troughs, the Federal Reserve (the Fed) uses monetary policy to control inflation, deflation, and disinflation.

The Effect of Monetary Policy

The Fed focuses on the Consumer Price Index for All Urban Consumers: Less Food and Energy.﻿﻿ It excludes volatile gas and food prices. This measurement is more popularly known as the core inflation rate.

The Fed sets a target inflation rate of 2%. If the core rate rises much above that, the Fed will execute a contractionary monetary policy. It will increase the federal funds rate. This is the rate at which banks lend to each other overnight. Historically, this action reduces demand and forces prices lower.

The Fed can also lower the federal discount rate, which makes it cheaper to borrow money from the Fed itself. This is an attempt to increase demand and raise prices.

Other tools that the Fed uses are reserve requirements (increasing the amount held in reserves), open market operations (increasing transactions in U.S. securities), and reserve interest (paying interest in excess reserves to banks).﻿﻿

U.S. Inflation Rate History and Forecast

The best way to compare inflation rates is to use the end-of-year CPI. This creates an image of a specific point in time.

The table below compares the inflation rate (December end-of-year) with the fed funds rate, the phase of the business cycle, and the significant events influencing inflation. A more detailed forecast is in the U.S. Economic Outlook.