Token inflation is the annual rate at which total supply grows through new emissions. It funds rewards and incentives but dilutes existing holders and creates sell pressure. A design that inflates faster than it builds demand sinks is effectively printing its own decline.
Presenting inflation against max supply to shrink the visible number is a disclosure failure. Professionals read inflation against circulating supply, and they will catch it.
How it is calculated
Divide new tokens emitted in a period by total supply at the start of that period. A protocol with 1 billion max supply and 100 million circulating at launch that emits 50 million in year one has 50% inflation against initial circulating supply and 5% against max supply.
Both numbers matter for different reasons. The circulating-supply rate is what existing holders experience as dilution. The max-supply rate is what valuation models use to calculate fully diluted valuation decay.
Design consequence
Capped supply inflation trends to zero as the emission schedule exhausts the remaining supply, so the question is one of timing: how fast that supply is released.
Uncapped supply makes inflation a permanent variable. It demands a mechanism to create sustained demand at least equal to the emission rate, or the token depreciates continuously. Most modern designs prefer a capped supply with a tapering schedule precisely to avoid the perpetual-inflation problem.
Example
Ethereum's post-Merge policy shifted to a dynamic staking issuance rate offset by a base fee burn under EIP-1559. Net inflation has ranged from mildly inflationary to mildly deflationary depending on network activity.
It shows that inflation can be made partially responsive to demand: high activity burns more fees and reduces net issuance. Most protocol designs lack this mechanism and run static schedules, making their inflation rate entirely supply-side determined.
See Tokenomics Design for how this applies in practice.
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