Which of these U.S. events occurred in 1920? President Wilson was re-elected, "The Great Gatsby" was published, inflation hit a record high or Babe Ruth made his debut. In 1920, inflation in June was almost 24 percent higher than it had been the previous year.
RACHEL CRANE, CNN CORRESPONDENT: Inflation is the textbook term for prices rising over time and purchasing power falling. Think of a trip to the grocery store. It sets you back $100. A year from now, you buy all the same items but they now cost $103. That's inflation, three percent to be exact.
So what causes inflation? A rise in production cost is one scenario. For example, booming energy prices can drive up the cost of transportation or manufacturing. Rising wages can also contribute to inflation. If business owners have to pay workers more, they might also raise prices to cover those higher labor costs.
Inflation can also happen when the demand for goods exceeds supply, then businesses selling those items can increase prices. Prices going up slowly is generally considered a good thing, especially if wages rise too. It helps keep the economy dynamic and growing. The U.S. Central Bank has even a target inflation rate, two percent.
But inflation can quickly get out of control when governments print too much money to pay for spending. When not enough real value underlies that paper, prices surge. That's called hyperinflation. It happened in Germany, in Zimbabwe in the 2000s and most recently in Venezuela and it's the Feds job to make sure the United States keeps the inflation rate on track.