Inflation

Here's the simplest way to think about inflation: your dollar buys a little less every year. At 3% annual inflation, something that costs $100 today will run you about $134 in 10 years. That slow erosion of purchasing power is exactly why just stashing cash under the mattress (or in a low-yield account) means you're quietly losing money in real terms.

The Consumer Price Index (CPI) is the main way we measure inflation. It tracks price changes across a basket of everyday goods and services. Core CPI strips out volatile food and energy prices to show the underlying trend. The Federal Reserve targets 2% annual inflation as the sweet spot for economic stability.

Inflation has a big impact on your investment decisions. To just break even in purchasing power, your investments need to earn at least the inflation rate. A savings account paying 4% APY with 3% inflation only gives you 1% in real returns. Stocks have historically returned 7-8% after inflation, making them essential for building long-term wealth.

Some assets hold up better when inflation runs hot: real estate (property values and rents tend to rise with prices), commodities (their prices rise almost by definition), TIPS (Treasury Inflation-Protected Securities that adjust with CPI), I-Bonds (savings bonds indexed to inflation), and stocks of companies with pricing power—meaning they can pass higher costs on to customers without losing business.

For your financial planning, assuming 2-3% long-term inflation is reasonable. That means if you need $50,000/year in retirement today, you'll need roughly $67,000 in 10 years and $90,000 in 20 years just to maintain the same lifestyle. Factoring in inflation prevents you from underestimating what you'll actually need.