Inflation Causes and What It Means in 2025

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There are a number of causes for inflation. Supply and demand play a big role in inflation, as do fiscal and monetary policies. Sometimes they work independently, and sometimes they work in conjunction with one another.

As a result, inflation is cyclical, changing from month to month and year to year.

Demand-Pull Inflation (Too Much Demand)

Imagine a booming economy in which consumers are flush with cash and buying everything in sight, depleting inventories across a number of industries. Prices will naturally rise across the board, resulting in widespread inflation.

This type of economic environment is known as “demand-pull” inflation, as the demand for goods and services pulls prices higher in the economy at large.

Demand-pull inflation can also appear even if demand isn’t particularly high. Anything that puts the supply/demand equation out of balance will result in demand-pull inflation. So even if demand isn’t off the charts, if supply is limited, the same effect can occur.

Cost-Push Inflation (Rising Input Costs)

Cost-push inflation occurs when rising production costs, such as wages or materials, force businesses to raise prices, which then contributes to broader inflation.

Employers face a wide range of expenses, and each one can play a role in driving inflation.

Wages

Over time, most employers have to pay out rising wages. While wages can increase to a level that exceeds inflation without having a major effect on it, an analysis by the Federal Reserve Bank of Boston found a strong correlation between consumer price inflation and the Employment Cost Index.

Government regulation

Increases can also result from government regulation. California, for example, was one of the first states to raise its minimum wage to $15 an hour — well above the federal requirement of $7.25 an hour — and it since has ticked up to $16 an hour, with fast food employees earning at least $20 per hour.

Cost of benefits and supplies

Employers also have to deal with the rising cost of benefits, from 401(k) fees to health insurance, and this is on top of the expense of the raw materials some businesses require, from oil to copper to countless other raw materials costs.

Fiscal Policy (Stimulus Spending and Tax Cuts)

Fiscal policy refers to how a government handles things such as taxation and spending to influence consumer activity and the economy overall.

A recent example of fiscal policy influencing inflation is the massive stimulus packages provided by the government starting in 2020. Primarily in the form of stimulus checks and other advance tax credits and forgivable business loans, the trillions of dollars in stimulus distributed by the U.S. government most likely played a role in triggering the inflationary pressures seen in 2021 and 2022.

Monetary Policy (Low Interest Rates and Fed Actions)

Monetary policy refers to the actions of central banks, like the U.S. Federal Reserve, to control the money supply. When the Fed lowers interest rates, as it did at the onset of the COVID-19 pandemic in 2020, it creates an expansionary monetary policy, which increases the money supply and makes it cheaper for both businesses and consumers to operate.

However, when monetary policy is left in an expansionary position for too long, inflation is prone to rise. This is the battle the Fed is currently waging. After years of low federal funds rates, and a reduction to near 0% to encourage spending during the pandemic, inflation shot up to its highest level in over 40 years, prompting the Fed to aggressively raise rates to keep inflation in check.

Of course, the Fed can overshoot its mark and leave monetary policy too tight for too long, which can result in a recession. This is the fear that many economists had for 2025.

What Drove the 2022 Inflation Spike?

In 2022, inflation spiked up to 9.1%, the biggest year-over-year increase in 40 years. Since then, the rate has fallen dramatically, but it’s still stubbornly above the Federal Reserve’s 2% target.

Supply chain disruptions made headlines in 2022 as manufacturers of many products, from cars to computer chips, were unable to keep up with demand at a time when Americans were flush with extra cash from pandemic stimulus. This two-pronged assault — the low supply of products during the high-demand stimulus-check era — were some of the most important factors contributing to high inflation in 2022.

The third shoe came in the form of the pandemic-era fiscal policy orchestrated by the Fed, which dropped interest rates to essentially zero in order to prevent the economy from coming to a standstill. This contributed to the “free money” period that stimulated massive growth.

What’s Driving Inflation in 2025?

A number of factors are keeping the inflation rate elevated, and may actually push it higher in 2025.

• One major driver is housing. Demand remains high while supply is limited, continuing to push home prices upward in many markets and adding to the overall inflation rate.
• Food prices are also still elevated, lingering from the inflation spike of 2022. On the other hand, energy prices have declined in the first five months of the year, offering some relief.
• Still, economic policy remains a wildcard. Fiscal policy is uncertain so far in 2025, and the Federal Reserve’s next move may be the most influential factor in determining the inflation outlook for the rest of the 

How Inflation Affects Different Regions and States

The CPI is a national average inflation rate, but where in the country you live also plays a role on the price increases you experience. The BLS doesn’t measure inflation rates on a state-by-state basis, but it does measure it by regions and by narrower categories it calls divisions.

Changes in population size is a major factor, in part because of its influence on housing costs, which have been a primary driver of inflation. An analysis by Moody’s Analytics revealed that population growth correlates with higher inflation due to increased housing demand, and that shrinking population correlates even more strongly with decreases in inflation. So you can expect that the states seeing the largest increases in new residents have higher inflation during the influx, but their inflation rates fall more sharply as people move out again.

Other more local factors include prices for food and other difficult-to-transport products, local business and industry trends and energy and fuel usage.

• The Mountain division of the Western U.S. had the highest inflation rate in 2022, but it has the lowest rate in 2024 — 2.0% compared to the national average of 2.9% as of July. The Mountain division includes Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah and Wyoming.
• The Middle Atlantic, which includes New York, New Jersey and Pennsylvania, and New England, which includes Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont, had the smallest inflation rates in 2022. However, they have the most persistent inflation as of July 2024 — 3.7% and 3.5%, respectively.
• The West South Central division, which includes Arkansas, Louisiana, Oklahoma and Texas, had the highest inflation rate in July 2022 — 9.7%. It currently has the second-lowest, at 2.5%.

Key Findings by State

• Nine states had inflation rates of 4.0%, the highest state rate in the country, as of March 2024. They are Alabama, Alaska, California, Hawaii, Kentucky, Mississippi, Oregon, Tennessee and Washington. The largest grouping — Alaska, California, Hawaii and Oregon — are in the Pacific division.
• Tying for lowest state inflation rates as of March 2024 are Arizona, Colorado, Idaho, Montana, Nevada, Utah and Wyoming, with a 2.5% inflation as of March 2024. All are in the Mountain division. These states were among those with the highest rate, 10.4%, in March 2022.

Who Benefits From Inflation?

Rapid gains in inflation tend to be harmful for everyone, as they generally lead to out-of-control prices and a recessionary economy. However, modest levels of inflation can benefit many.

• Companies can charge higher prices in a slightly inflationary economy, potentially leading to higher profits and better returns for investors.
• Those with large, fixed-rate loans, such as home mortgages, benefit from rising inflation, as they are paying their housing costs with more valuable dollars.
• Investors holding Treasury Inflation-Protected Securities, or TIPS, can also benefit from increased returns in an inflationary environment — but you should speak with a financial advisor to fully understand these complicated securities.

What To Watch for Next

Predicting the direction of inflation, like the stock market, can be a fool’s errand. However, there are some signs that can help point out the most likely course ahead.

Right now, many experts are still hoping for a “soft landing.” This refers to a decline in inflation accompanied by a slowdown in the economy that doesn’t tip into a full-blown recession. That’s the ultimate aim of the Federal Reserve, which has toyed with the idea of lowering interest rates at some point in 2025 to stave off an economic contraction.

However, a soft landing is far from a certainty. Many economists are still predicting a recession in 2025, perhaps triggered by the Trump Administration’s tariff policy. Other economic indicators suggest that the American consumer doesn’t have enough extra money, dragging down spending and overall growth. While helpful in terms of containing inflation, this reduction in economic activity may be strong enough to pull the economy into a recession.

Daria Uhlig contributed to the reporting for this article.

For this study, GOBankingRates analyzed the 12-month change in percentage for the Consumer Price Index (CPI) for each state. First GOBankingRates found the BLS region and BLS division for each state from the Bureau of Labor Statistics Local Area Unemployment Statistics. Next GOBankingRates found the 12-month percentage change for the CPI for each BLS division for every three months in the last two years starting with January 2022 and ending with July 2024 as that is the most up-to-date data available. Each data point represents the percentage change from 12 months prior. All data was collected on and is up to date as of May 12, 2025.

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