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Inflation is the increase in the price of goods and services over time and the resulting decrease in the purchasing power of a given currency.
Inflation decreases the value of a dollar (or other currency), and when inflation increases, you can buy less and less with your money. Economists measure the increase or decrease in inflation over time. This measurement is known as the inflation rate. We see the effects of inflation in many areas of our lives. Some of these effects are price increases in housing, food, fuel, and consumer goods. While moderate inflation can have some benefits, consumers tend to focus on the fact that their money can’t go as far as it used to.
A practical example of inflation is the price of gasoline. According to the U.S. Bureau of Labor Statistics, the price of gasoline experienced an inflation rate of about 3.10% per year between 2000 and 2019. So a tank of gas that cost $20 in 2000 would cost you more than $35 in 2019. That’s a pretty hefty increase. The inflation rate for gasoline was about 1% higher than the general inflation rate during that period.
Inflation is like a leak in your money bucket…
When the inflation rate is low, the leakage is smaller. When the inflation rate is high, the leakage is larger. The bigger the leakage, the less your money is worth – and the more of it you need to buy the same basket of goods and services in a year.