The rate at which the general level of prices rises over time, reducing purchasing power.
Inflation is the rate at which prices for goods and services increase over time, eroding your purchasing power. If inflation is 3%, a dollar today buys roughly 3% less stuff than it did a year ago. Inflation is driven by rising wages, commodity prices, energy costs, and demand outpacing supply. Modest inflation (around 2% annually) is considered normal and healthy by central banks. High inflation (above 5%) erodes savings and makes planning difficult; very high inflation (hyperinflation) can devastate economies. Inflation affects everyone: it reduces real returns on savings, increases borrowing costs, and erodes long-term fixed-income investments. Understanding inflation is crucial for investment planning; stocks and real estate are considered inflation hedges because they tend to appreciate with inflation.