What is inflation and why does it matter?

Inflation is a broad rise in prices over time. It erodes purchasing power and affects interest rates, valuation, and asset returns.

Quick Definition

Inflation is the rate at which prices rise over time, eroding purchasing power. Central banks typically target 2% annual inflation. High inflation hurts bond returns and raises borrowing costs.

Use this concept with tools

Inflation-adjusted Return

Nominal return vs purchasing-power return.

CAGR

Convert between annualized rate and final amount.

Compound Interest

Growth with recurring contributions and compounding frequency.

Related concepts

What is the difference between nominal and real returns?

Nominal return is your raw percentage gain. Real return ≈ Nominal return − Inflation rate. If a fund returns 8% but inflation is 3%, your real gain is only ~5% in purchasing power.

What is the relationship between risk and return?

Higher potential returns come with higher risk — this is the fundamental risk-return tradeoff. Smart investing isn't about avoiding risk; it's about taking only the risk you understand and can afford.