Inflation

Definition

Inflation is when your money buys less over time because prices have risen across the economy. If inflation averages 3% annually, something costing $100 today will cost about $103 next year. Moderate inflation (2-3% annually) is normal and expected. High inflation erodes purchasing power fast and makes long-term financial planning difficult. Deflation (prices falling) is rare and usually signals serious economic problems.

Why it matters

Inflation is the silent wealth killer. A savings account earning 0.5% APY while inflation runs at 3% means you're losing 2.5% in purchasing power every year. Your $50,000 isn't worth less in the account, but it buys less stuff. This is why inflation-proof investments matter. Treasury bonds, stocks, and real estate historically keep pace with inflation over long periods. Cash is the worst place for money you plan to keep for decades because inflation eats it slowly but relentlessly.

Quick example

In January 2020, a new car cost $40,000 on average. By January 2024, the same car cost about $47,000. That 17.5% increase over 4 years reflects inflation plus supply shortages, but the baseline point stands: inflation reduces what your money can buy. Someone who saved $50,000 in cash in 2020 can't buy as much with it in 2024 due to inflation alone.

The bottom line

Knowing what Inflation means helps you make better day-to-day money decisions. It makes rates, account options, and tradeoffs easier to compare.