Inflation
The rate at which prices across an economy are rising, which means each unit of money buys a little less.
In plain English
The rate at which prices across an economy are rising, which means each unit of money buys a little less.
Inflation is the slow leak in your money's value. If inflation is 3%, something that cost $100 a year ago now costs about $103. Measures like the CPI track it.
Central banks usually aim for about 2%. When inflation runs hotter, they raise interest rates, which tends to support the currency; when it is cool, they may cut. That is why inflation releases are some of the most explosive events on the forex calendar.
Worked example
What inflation does to cash
- You hold $1,000 in cash.
- Inflation runs at 5% for a year.
- Your $1,000 now buys about what $952 bought a year earlier.
Bottom line: The number in the account did not change; what it buys did.
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