What inflation is

Inflation is a general, sustained rise in prices across the economy. Not one product getting dearer, but the overall cost of living creeping up, so that each unit of money buys a little less than it did. If a basket of goods cost 100 last year and the same basket costs 103 this year, inflation is 3 percent.

How it is measured

Statisticians track the price of a fixed basket of goods and services that a typical household buys: food, housing, transport, energy and much more. In the United States the main gauge is the Consumer Price Index, or CPI, published each month by the Bureau of Labor Statistics. The headline number is the change over the past twelve months. US consumer prices rose 3.4 percent in the year to August 2026, with the next reading due on 14 October 2026.

Why a little is the goal

It sounds odd, but central banks want some inflation. The Federal Reserve, like most, targets about 2 percent a year. A small, steady rise in prices gives firms room to adjust wages and prices and keeps the economy clear of deflation, a fall in prices that can stall spending. The danger is inflation that runs well above target or climbs fast, which is what central banks fight by raising interest rates. Our explainer on how the Federal Reserve works covers that fight.

Headline and core

You will often see two inflation numbers. Headline inflation covers everything in the basket. Core inflation strips out food and energy, whose prices swing sharply from month to month, to show the steadier underlying trend. Central banks watch core closely, because it is a better guide to where inflation is heading than a single noisy month, even though it is the headline figure that most affects household budgets.

What it does to your money

The core effect is on purchasing power, the amount your money can actually buy. Cash loses ground: a note under the mattress keeps its number and loses its value, and at 2 percent inflation, money left in cash loses roughly a tenth of its purchasing power over five years. Savings can lose in real terms too. What matters is the real return, your interest rate minus inflation. If an account pays 3 percent while inflation is 3.5 percent, you are losing about half a percent a year in what the money can buy, even though the balance rises. Our explainer on compound interest shows why that real-return gap matters over decades.

Who wins and who loses

Inflation does not hit everyone equally. Borrowers with fixed-rate debt can gain, because they repay loans with money that is worth less than when they borrowed. Savers and people on fixed incomes tend to lose, because their money or pension buys less each year. And your personal rate depends on what you actually buy, because prices rise faster in some categories than others.

How people protect against it

There is no way to switch inflation off, but there are ways to blunt it. Compare your savings rate against current inflation and move to higher-yield accounts when it makes sense; our rates and returns tracker maintains sourced figures. Consider assets that have historically outpaced inflation over long periods, such as a diversified mix of shares, accepting the extra risk that brings. And build inflation into long-term plans, because a sum that looks ample today may fall short in twenty years.

The bottom line

Inflation is the slow tax nobody votes for. It rarely makes a dramatic headline at 3 percent, but compounded over years it reshapes what your savings are worth. The single habit that helps most is to judge money by its real return, what it buys, not the number on the statement. The glossary defines the terms.