Inflation describes a decline in the purchasing power of money over time.
When inflation occurs, the average prices of goods and services rise, so the same amount of currency buys fewer goods or services. Economists commonly measure inflation with price indexes, including the Consumer Price Index and the Personal Consumption Expenditures price index.
For investors, inflation matters because a return must be compared with the change in purchasing power. A savings account earning 3% during a period of 5% inflation has a negative approximate real return before taxes and fees, even though its nominal balance increased.
Inflation is different from deflation, which describes a broad decline in prices. It is also different from appreciation, which usually means an asset’s value has risen. Some assets, such as inflation-linked bonds, are designed to respond to changes in measured inflation.