Inflation Explained: An Interview with Francesco D’Acunto, PhD

Inflation affects all of us—and not just in the ways you might expect. That’s why we asked Wealthfront Investment Advisory Board member Francesco D’Acunto, a Georgetown Professor and published expert in the field, to answer our questions about this important topic that’s been making headlines. In this Q&A, he shares some surprising insights and valuable historical context for anyone who wants to understand our present moment a bit better. 

To start, can you remind readers what’s going on with inflation today?

FD: The Federal Reserve’s preferred measure of inflation is the Personal Consumption Expenditures Price Index (PCE), and they target a long-term rate of 2%. The PCE is very broad, and is based in part on the “Core” Consumer Price Index (CPI), which more closely reflects the direct effect of inflation on households. Core CPI measures the change in the prices of goods and services year over year, except for energy and food (which are both very volatile). From its peak of 6.6% in September 2022, Core CPI inflation declined steadily for a while, reaching 2.7% in May 2025. However, inflation rose above 3% again in July and August. 

What happened? US retailers are coming to terms with tariffs, and are gradually increasing prices in order to reduce the hit to their profits. If this pattern continues, we’re likely to see inflation increase further in the coming months.

Most people already know that when inflation is high, they’ll pay more for goods and services. But what are some more surprising ways that inflation affects consumers?

FD: People usually focus on the negative effects of inflation, but they may not realize it has a surprising benefit: Inflation reduces the value of debt consumers owe to lenders. This benefit applies to people who hold debts such as mortgages, car loans, student loans, or medical loans. 

When consumers take on these debts, they receive a lump sum up front to purchase an asset (house, car, etc) that is valued at the time of purchase. In return, they agree to repay a fixed amount, typically on a monthly basis, that does not change over time (assuming it’s a fixed-rate loan). 

As inflation rises, the dollar value of the purchased asset also goes up. However, the monthly repayments remain constant, based on the original purchase price. This means that consumers end up paying a lower proportion of the value of the asset over time than they would if inflation did not increase over the life of the loan. For example, imagine you bought a $30,000 car five years ago that you are still paying off. Even if the car would cost you $35,000 today, your payments are still based on the original $30,000 price.

Some pundits have warned about the potential for “stagflation.” Can you explain how this is different from regular inflation, and share your perspective on how people can prepare for this possibility? 

FD: Stagflation is a situation in which high inflation is paired with high unemployment, indicating an economic downturn exacerbated by rising prices. Many consumers think that stagflation is common, because they think that when inflation is high, all the other parts of the economy are also doing badly. In reality, stagflation is relatively rare. Typically, periods of inflation are associated with economic growth and low unemployment, such as during the 2021-2022 inflation surge after the pandemic.

It’s true that some people are concerned about the potential for stagflation in the future. That’s because inflation has started to increase again due to tariffs, while the unemployment rate has also started to increase. At this stage, though, we are far from stagflation. The US unemployment rate is still low (around 4%) and inflation is at a sustainable level.

If you are concerned about stagflation, now is a good time to ensure you have an adequate emergency fund—especially If you believe you might face unemployment. Having a good emergency fund can help you avoid the need to pull from your retirement accounts or long-term savings, so you stay on track for your long-term goals. And while it might be tempting to hoard cash well beyond what you need for your emergency fund, it’s smart to keep investing for the long term if your situation allows for it.

Does today’s inflation bear resemblance to any historical instances of high inflation? If so, what can that episode tell us about what the future might hold?

FD: The famous quote attributed to Mark Twain, “history doesn’t repeat itself, but it often rhymes,” is relevant here. The current situation is different from what we’ve seen in the past, but there are still some lessons we can take from it. 

The latest period of high inflation was in the 1970s, driven by an energy crisis and supply shocks, which raised the risk of a recession in the US and abroad. Many countries increased government spending to help consumers face rising costs, further exacerbating inflation. This “vicious circle” only ended when then-Fed Chairman Paul Volcker raised the federal funds rate to 20% in 1980, a move also known as the “Volcker shock.” This triggered a major recession but ultimately broke the challenging cycle of inflation.

The recent inflationary episode has key differences from the 1970s. Most importantly, the US and other economies have not experienced a recession; in fact, unemployment rates have remained at their lowest levels in years. This stability has allowed central banks to raise interest rates moderately to get inflation under control without inducing any recessions. Consider that the peak range of the Fed funds rate during the recent episode was 5.25%-5.5%, and the range currently stands at 4.00%-4.25%, which many observers expect to further decline at the next FOMC meeting on October 29, 2025. These numbers are far below “Volcker shock” levels, and we have already passed the peak. We aren’t experiencing the “vicious circle” we saw in the 1970s either, so there is no reason to expect that a major recession needs to happen before inflation can be tamed.

Moving forward, the key factor affecting the US economy will be the uncertainty surrounding the impact of tariffs. Details of trade agreements are still emerging, and the Supreme Court is expected to rule on the legality of tariffs implemented without congressional approval this fall. It is still too early to determine how tariffs might reshape the US and global economies, if at all. 

How can investors factor inflation data like the CPI into their financial decisions?

FD: Academic research tells us that the best course of action is to keep investing regardless of changes in the macroeconomic environment, including CPI inflation data. The reason is that such changes primarily reflect short- and medium-term business cycle fluctuations, rather than long-term trends, and most people invest to accumulate wealth for the long run.  

A simple yet effective way I convinced my mum, who is often skeptical about finance and investments, of this was by getting her to Google the performance of S&P 500® index over the last five years. This index includes the top 500 companies listed on the New York Stock Exchange, and it represents a significant portion of the US economy. If you look at the value of the S&P 500® index just before COVID-19 hit in March 2020 and at the most recent values, you can draw a line of exponential growth. Sure, we experienced volatility along the way, but despite all the news about CPI inflation, monetary policy, tariffs, and geopolitical risk, returns on equity assets remained strong. These short-term shocks have not stopped the overall upward trajectory of the US economy.

Ultimately, for anyone making long-term investment decisions, such as building wealth for retirement or for big expenses like buying a house, the economic information that financial institutions, the media, and politicians monitor closely are less critical than following consistent investment strategies for the long term.