Generally speaking, using setState inside useEffect will create an infinite loop that most likely you don't want to cause. There are a couple of exceptions to that rule which I will get into later.

useEffect is called after each render and when setState is used inside of it, it will cause the component to re-render which will call useEffect and so on and so on.

One of the popular cases that using useState inside of useEffect will not cause an infinite loop is when you pass an empty array as a second argument to useEffect like useEffect(() => {....}, []) which means that the effect function should be called once: after the first mount/render only. This is used widely when you're doing data fetching in a component and you want to save the request data in the component's state.