inflation
The rate at which the general level of prices for goods and services rises, eroding purchasing power.
Example
“Inflation of 8% meant that groceries that cost $100 last year now cost $108.”
Memory Tip
INFLATE a balloon — prices inflate (blow up) over time with inflation.
Why It Matters
Inflation is the silent tax on savings. Money sitting in a low-interest account loses purchasing power every year inflation exceeds the interest rate. Understanding inflation is essential to making investment decisions that preserve and grow real wealth rather than just nominal dollar amounts.
Common Misconception
Many people think inflation only affects prices at the grocery store. Inflation affects everything from wages to asset values to interest rates. Moderate inflation at around 2% is actually the target of central banks because it encourages spending and investment. Deflation or falling prices is generally considered more economically dangerous.
In Practice
If inflation runs at 3% annually $100,000 in a savings account earning 1% loses roughly $2,000 in real purchasing power each year. Over 10 years that account has a nominal value of $110,000 but buys only what $86,000 would buy today. This is why long-term savings must be invested in assets that outpace inflation.
Etymology
From Latin 'inflare' meaning 'to blow into' — like inflating a balloon, prices puff up.
Common Misspellings
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