Inflation
The general rise in prices across an economy over time, which means each dollar buys a little less than before.
What it means
Inflation is the rate at which the overall price level rises. In the U.S. it is most often measured with the Consumer Price Index (CPI), which tracks the cost of a broad basket of goods and services that households buy. The Federal Reserve targets inflation of about 2% a year over time.
Moderate inflation is normal, but it quietly erodes cash and fixed incomes. Money that earns less than the inflation rate loses purchasing power, even if the balance grows. Inflation also affects borrowers: fixed-rate debt becomes easier to repay in inflated dollars, while variable rates often rise when inflation is high.
Example
Suppose inflation runs 3% a year. A grocery bill of $100 today would cost about $103 next year and about $134 after ten years of 3% annual increases.
How it’s used
- Judging whether savings and investments are really growing
- Planning retirement income needs decades ahead
- Understanding cost-of-living adjustments to wages and Social Security
See it in the data: How much prices have risen since 2006, item by item →
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.