Inflation

The rate at which prices increase during a specific period of time, usually a year. It can be used to track prices on a broad scale, such as is done in the Consumer Price Index, or quite specific, such as the cost of a gallon of gasoline. In simple terms, as prices go up, the buying power of money goes down. For example, assume a widget cost $1 last year, and this year the same widget costs $2. If you keep all your wealth in cash (rather than investments that appreciate in value or that pay any interest), then you will be able to buy only half as many widgets this year as your could last year. Similarly, assume you never buy widgets with your accumulated wealth but instead buy them using the money you earn. In that case, unless your salary also went up by 100%, you will similarly be able to buy only half as many widgets as you did last year (assuming no other changes to your income or expenses).

Inflation, according to the Federal Reserve, is “the increase in the prices of goods and services over time. Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Rather, inflation is a general increase in the overall price level of the goods and services in the economy. To read more, read “What is inflation and how does the Federal Reserve evaluate changes in the rate of inflation?“