Inflation

Inflation is the rate at which the general level of prices rises over time. As prices go up, each unit of a currency buys less than it did before. This loss of purchasing power is what inflation describes.

Economists measure inflation using price indexes. A common one is the Consumer Price Index, which tracks the average price of a basket of goods and services that households buy. The percentage change in such an index over a period, often a year, is reported as the inflation rate.

Inflation matters for savers because cash that is not earning a return still loses purchasing power as prices climb. If the return on money is lower than the inflation rate, its inflation-adjusted value falls even when the nominal balance stays the same. Rates vary over time and depend on many factors, so future levels cannot be known in advance.