Inflation explained

Inflation is the slow rise in prices across the economy, which is equivalent to the slow decline in the purchasing power of the dollar. A dollar in 1985 bought what about $2.85 buys today. That isn't because '2025 dollars' are different dollars — it's because the same dollar buys less because of 40 years of price increases.

How it's measured

The most common US measure is the Consumer Price Index (CPI), a monthly number that tracks the prices of a basket of goods and services an urban consumer might buy. The year-over-year change in CPI is the 'inflation rate' you hear in news headlines. The Fed's preferred measure is actually the PCE (Personal Consumption Expenditures) index, which tracks slightly different things and usually runs a bit lower than CPI.

Why inflation destroys cash savings

If your savings account pays 0.5% per year and inflation is 3%, you're losing 2.5% of your purchasing power every year. Money in a savings account isn't 'safe' in real terms — it's slowly eroding. This is why a high-yield savings account matters. If inflation is 3% and your HYSA pays 4%, you're at least keeping up.

The emotional weight

Inflation feels much worse than it is mathematically because humans notice rising prices at the checkout but don't notice rising salaries on the same schedule. If your wages and investments rise faster than inflation — which has been the long-run average — you're getting richer. If they don't, you're getting poorer. The number by itself tells you nothing without the context of your income trajectory.