What is Inflation?

Inflation is the increase in the price of goods and services over time and the resulting reduction in the purchasing power of a given currency.

🤔 Understanding inflation

Inflation decreases the value of a dollar (or other currency), and as inflation rises, your money can buy less and less. Economists measure the increase or decrease in inflation over time. This measurement is known as the inflation rate. We see the effect of inflation in many areas of our lives. Some of these effects include price increases for housing, food, fuel, and consumer goods. While there may be some benefits to moderate inflation, consumers tend to focus most on the fact that it means their money can’t go as far as before.

For a real-world example of inflation, let’s look at the price of gasoline. According to the U.S. Bureau of Labor Statistics, the price of gas saw an inflation rate of about 3.10% per year between the years 2000 and 2019. So a tank of gas that cost $20 in 2000 would cost you more than $35 in 2019. That’s a pretty hefty increase. The inflation rate for gas during that time period was about 1% higher than the overall rate of inflation.

What this means for you

Inflation is like a leak in your money bucket...

If the inflation rate is low, the leak is smaller. If the inflation rate is high, the leak is bigger. The more leakage there is, the less your money is worth — and the more of it you’ll need to buy the same basket of goods and services a year from now.

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