Your Net WorthGlossary
Inflation
Inflation is the rate at which prices rise and the purchasing power of money falls over time.
If inflation runs at 3% for a year, a basket of goods that cost £100 at the start costs roughly £103 at the end. Your cash still says £100, but it buys less.
Inflation matters for every financial plan. A savings account paying 4% interest with 3% inflation delivers a real return of about 1%. A wage rise below inflation is effectively a pay cut.
Central banks target low and stable inflation, commonly 2% in the UK and the US. They measure it with indexes such as the Consumer Prices Index (CPI) or the Consumer Price Index for All Urban Consumers (CPI-U).