What Is Inflation?

Inflation is the rate at which the general level of prices rises over time, reducing what each unit of currency can buy.

How It Works

If inflation is 3% per year, something that costs $100 today would cost approximately $103 next year. Your $100 buys less over time — this is called the erosion of purchasing power.

Why It Matters for Investors

Cash sitting in a non-interest-bearing account loses real value during inflation. If your savings earn 0% and inflation is 3%, your money is effectively worth 3% less each year in terms of what it can actually buy.

Common Causes

• Demand-pull: Too much money chasing too few goods
• Cost-push: Rising production costs (energy, labor) passed on to consumers
• Monetary expansion: Central banks printing more money increases the money supply

How It's Measured

In the U.S., the Consumer Price Index (CPI) tracks the average price change of a basket of goods and services over time. Most countries have similar measures.

The Investing Connection

One reason people invest is to earn returns that outpace inflation, preserving or growing their purchasing power over time.