Inflation

Inflation measures how much more expensive a set of goods and services becomes over a period of time. When inflation rises, each unit of currency buys fewer goods and services, meaning your money loses purchasing power. The Consumer Price Index (CPI) is the most common measure of inflation in the United States.

Moderate inflation of around 2% annually is considered healthy for economic growth. However, high inflation erodes savings, distorts investment decisions, and disproportionately affects people on fixed incomes. Deflation, or falling prices, can be equally harmful as it discourages spending and investment.

To protect against inflation, investors turn to assets that historically outpace inflation such as stocks, real estate, TIPS (Treasury Inflation-Protected Securities), and commodities. Understanding inflation is crucial for retirement planning, as a 3% inflation rate means prices roughly double every 24 years.