Inflation

What Is It

Inflation is the general rise in prices across an economy over time, which is the same thing as saying a dollar's purchasing power is falling over that same time. It's usually measured with the Consumer Price Index (CPI), which tracks the cost of a broad basket of goods and services and compares it year over year. A 3% inflation rate means that basket costs 3% more than it did twelve months earlier — and a dollar that didn't grow at all now buys correspondingly less of it.

Why It Matters

Inflation is the reason "keeping money safe" in cash isn't actually free of risk — it just trades market risk for a slower, quieter kind of loss. A savings balance that earns 0% while prices rise 3% a year hasn't stood still, it's lost ground. This is also why any return figure needs a second look: a 7% return during a year of 6% inflation barely kept pace, while the same 7% during 2% inflation was a real gain. That distinction is exactly what Real vs. Nominal Returns separates out.

Inflation compounds the same way interest does — small annual increases stack on top of each other and add up to something much larger over a decade or two, which is part of why long-term financial planning has to account for rising costs, not just today's prices.

Quick Example

Based on published CPI data, prices rose roughly 44% cumulatively between 2010 and 2024. That means $100 of purchasing power in 2010 required about $144 in 2024 to buy the same basket of goods. Put another way: a fixed $100 bill tucked away in 2010 could only buy what about $69 would have bought back then by the time 2024 arrived — not because the bill changed, but because everything around it got more expensive.

Try It Yourself

See what any dollar amount from the past is worth today, or what today's dollars will be worth years from now.

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