The rate at which the general level of prices for goods and services rises, eroding purchasing power.
Inflation is the decline of purchasing power of a given currency over time, reflected in an increase in the average price level of a basket of selected goods and services in an economy. It is usually expressed as a percentage, showing the degree to which prices have risen. The Federal Reserve targets an inflation rate of around 2% as a sign of a healthy economy. However, high inflation can be harmful as it reduces the real value of money and savings. Moderate inflation is generally considered beneficial as it encourages spending and investment.
If inflation is 3% annually, an item that costs $100 today will cost $103 next year. Over 10 years at 3% inflation, that same item would cost approximately $134, demonstrating how inflation erodes purchasing power over time.