Inflation is calculated by the percentage change in consumer price index. This graph mainly shows prices going up, when the graph drops, the prices are still increasing but just at a slower rate. When the line is below 0, that is when deflation occurs.

The inflation rate is on the y axis and tracks the rate of inflation by calculating the movement of prices in a basket of goods. For this index particularly it represents the prices of goods for all urban consumers. During recessions, the rate of inflation decreases and during growth periods the rate of inflation increases. This is typically due to movements in the short term aggregate demand curve. As the economy grows, the curve shifts out raising price levels. As the economy shrinks, the curve shifts in decreasing price levels. Inflation tends around a set inflation rate by the fed as it is in the federal reserve mandate to maintain a certain rate of inflation. The highest inflation rate is in the 80s and this was due to a supply shock from the oil crisis. The lowest level on the graph is in the 1940s-45s, where the graph hits below zero. Rather than short term demand influencing price levels, the supply curve shifted left due to oil price increases and raised prices for all goods.