What Is Inflation and How Does It Affect Your Finances?

The Consumer Price Index measures the average change in prices paid by urban consumers for a basket of goods and services over time. It is the most widely used measure of inflation in the United States.

Purchasing power is the quantity of goods and services that a unit of currency can buy. Inflation erodes purchasing power over time, making it essential to invest in assets that grow faster than prices.

Deflation is a sustained decrease in the general price level of goods and services. While falling prices sound appealing, deflation is often a sign of economic distress and can trigger a damaging spiral of reduced spending, declining wages, and rising real debt burdens.

Hyperinflation is an extreme and rapid escalation of prices — typically defined as exceeding 50% per month — that causes currency to lose value so fast it becomes nearly worthless. It is one of the most destructive economic events a population can experience.

Stagflation is the rare and painful economic condition of simultaneous high inflation, slow economic growth, and high unemployment. It challenges policymakers because the typical remedies for inflation and recession work against each other.

The Federal Reserve is the central bank of the United States, responsible for setting monetary policy, regulating banks, and maintaining financial stability. Its decisions on interest rates ripple through every corner of personal finance.

Monetary policy is the set of actions taken by a central bank to manage money supply and interest rates to achieve economic goals like stable inflation and full employment. In the U.S., the Federal Reserve conducts monetary policy.