Inflation

Inflation is the rate at which the overall price level rises. In the US it is most commonly tracked by the Consumer Price Index, which measures the cost of a representative basket of goods and services.

Its practical effect is erosion of purchasing power. At 3% annual inflation, money loses roughly half its buying power over 24 years — so cash held for the long term is not safe, merely stable in nominal terms.

This is the core reason long-horizon savings get invested rather than held in cash. A savings account paying 4% while inflation runs at 3% earns a real return of about 1%; the same account during a 6% inflation year loses ground.

Inflation cuts both ways on debt. Fixed-rate borrowers repay with dollars that are worth less than the ones they borrowed, which quietly works in their favor.