Inflation is the gradual loss of purchasing power: when prices rise 3% a year, each dollar buys 3% less every year. Over a decade that compounds relentlessly — $100 at 3% annual inflation has the buying power of only about $74 after 10 years (100 / 1.03^10 = 74.41). This is why cash savings feel safe but quietly shrink, and why investments must beat inflation to build real wealth. The relationship is captured by the 'real return' approximation: real return ≈ nominal return minus inflation. A savings account paying 4% during 3% inflation earns about 1% in real terms — barely treading water.
The US Bureau of Labor Statistics publishes the Consumer Price Index (CPI), the standard inflation measure, tracking a basket of household goods and services. Its free inflation calculator translates dollar amounts between any two years using actual CPI data — far more accurate than applying a flat rate, because real inflation swung from double digits in the early 1980s to near zero in 2009 to the 2021-2022 spike. Economists consider ~2% annual inflation healthy; sustained high inflation punishes savers and anyone on fixed income, while deflation (falling prices) sounds pleasant but typically signals a sick economy. When planning decades ahead, use real (inflation-adjusted) returns for every projection — a 7% investment return at 3% inflation is roughly 4% of genuine growth, and that is the number your retirement actually runs on.