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Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.
Think of it this way: In 1970, a cup of coffee might have cost $0.25. Today, it might cost $3.00. The coffee hasn't changed, but the value of the money has decreased, requiring more dollars to buy the same item.
Central banks attempt to limit inflation and avoid deflation in order to keep the economy running smoothly. A moderate inflation rate of around 2-3% is generally considered healthy.
The most common measure of inflation is the Consumer Price Index (CPI).
Economists track the prices of a hypothetical "basket" of items that a typical household buys, including food, housing, clothes, transportation, and medical care. If the total cost of this basket goes up from $100 to $103 over a year, inflation is 3%.
Inflation is often called the "silent killer" of wealth because it works through compound interest in reverse.
If you keep $10,000 in a shoebox (earning 0% interest) and inflation is 3% per year:
In 20 years, your money has lost almost half its buying power without you spending a dime.
To beat inflation, your money needs to grow at a rate higher than inflation.
Not usually. While cheaper prices sound nice, deflation often means the economy is shrinking, leading to job losses and lower wages.
This calculator uses a standard compound interest formula based on the average rate you enter. Real-world inflation varies month to month, but this provides a strong estimate.
This occurs when inflation exceeds 50% per month. Prices skyrocket daily, and currency becomes worthless (e.g., Germany in 1923, Zimbabwe in 2008).
