Inflation
The gradual rise in prices that reduces what each dollar can buy over time.
What Inflation means
Inflation is the rate at which the prices of goods and services rise, reducing the purchasing power of money. If inflation averages 3% a year, something that costs $100 today would cost about $134 in ten years. This matters for saving and investing because money left as idle cash slowly loses value. Long-term investing aims to outpace inflation; that is one reason most people don't keep retirement savings in cash.
Example
A $20,000 emergency fund loses about $600 of purchasing power in a single year of 3% inflation if it earns no interest at all — another reason to keep it in a high-yield account.
Related terms
Disclaimer
Definitions are simplified for educational use and are not personalized financial, investment, tax or legal advice.