Inflation measures how much prices increase over time. When inflation is 3%, something that cost $100 last year costs $103 this year. The U.S. Federal Reserve targets 2% annual inflation.
How Inflation Is Measured
The Consumer Price Index (CPI) tracks prices of a basket of goods and services. The Personal Consumption Expenditures (PCE) index is the Fed's preferred measure.
Impact on Your Money
Inflation erodes purchasing power. $100 today buys less than $100 ten years ago. To maintain value, your investments must grow faster than inflation. At 3% inflation, your money loses half its purchasing power in about 24 years.