Roadmap · Level 4

Inflation

The rate at which prices rise and money loses purchasing power over time.

Inflation measures how much the price of goods and services increases over time. If inflation is 3% a year, something that cost $100 last year costs about $103 this year.

Picture it

$100

$86

$74

$55

Today

In 5 years

In 10 years

In 20 years

If prices rise 3% every year, $100 kept in a drawer still says $100 on it, but it buys less and less. After 20 years it buys what about $55 buys today.

Inflation matters for investing because it affects how the Federal Reserve sets interest rates, which in turn affects stock and bond prices. High inflation often leads to higher interest rates, which can make borrowing more expensive for companies and sometimes cool down stock market growth.

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