Glossary Term
Inflation
The rate at which the general level of prices for goods and services is rising.
Detailed Explanation
Inflation is the gradual loss of purchasing power over time, measured as a percentage rate at which the general level of prices for goods and services is rising. When inflation occurs, each unit of currency buys fewer goods and services. A small amount of inflation (around 2-3% per year) is generally considered a sign of a healthy, growing economy, but hyperinflation can destroy a nation's wealth.
Real-World Example
If the inflation rate is 5% per year, a basket of groceries that costs $100 today will cost $105 next year. If your salary doesn't also increase by 5%, you have effectively taken a pay cut in real purchasing power.
Key Takeaways
- •Inflation is the silent killer of wealth if your money is kept in cash under a mattress.
- •To truly grow wealth, your investments must generate a return that is higher than the inflation rate.
- •Central banks raise interest rates to cool down high inflation.