Lesson 8 of 8 12 min

Inflation

Why prices rise, what it does to the value of your money, and how to think in "real" terms.

Written by Mateo LermaLast reviewed September 20263 sources Editorial standards

All lessons in Money Fundamentals

Step 1: The lesson

What is inflation, and how does it affect your money?

Inflation is the general rise in prices over time. When prices rise, each dollar buys a little less. That's a loss of purchasing power.

In the U.S., inflation is commonly measured with the Consumer Price Index (CPI), published by the Bureau of Labor Statistics. It tracks the prices of a big basket of things people buy — food, rent, gas, clothing, and more.

Why do prices rise? Usually some mix of: people wanting to buy more than is available, costs going up for businesses (like wages or materials), and more money flowing through the economy.

Some inflation is normal. The Federal Reserve aims for inflation of about 2% a year over the long run. High inflation is the problem: it hurts savers and people whose income doesn't keep up.

Key term

Real return

What your money earns after accounting for inflation. A rough estimate: your interest rate minus the inflation rate.

This is why money that needs to last a long time — like retirement savings — usually has to grow faster than inflation. Cash sitting still for decades quietly loses value.

Step 2: See it

What $100 buys with 3% yearly inflation

Hypothetical example

Step 3: Real-world example

When a raise is really a pay cut

Two quick situations that show why you have to think in real terms:

Savings: Your account pays 1% interest while prices rise 3%. Your $1,000 becomes $1,010 — but things that cost $1,000 now cost $1,030. You can buy about 2% less than before.
Pay: You get a 3% raise, but inflation is 5% that year. Your paycheck is bigger, but it buys about 2% less. In real terms, that's a pay cut.

Numbers that go up aren't always gains. Always ask: up compared to what prices are doing?

Step 4: Try it

Inflation calculator

See what something costs in the future — and what today's money will be worth — at a hypothetical inflation rate.

Your numbers

Amount today

Yearly inflation rate

The Federal Reserve aims for about 2% over the long run.

Years from now

Results

What $100 of stuff costs in 10 years

$134

Same things, higher price

What $100 buys in 10 years

$74

In today's dollars

At 3% a year, money that sits still loses about 26% of its buying power over 10 years. To keep up, it needs to earn at least 3% a year.

Educational calculator, not financial advice. Results are hypothetical estimates based on the numbers you enter.

Step 5: Knowledge check

Quiz: Inflation (3 questions)

Answer each question, then check your answer to see the explanation. Retake it as many times as you like.

Question 1 of 3

Step 6: Summary

Summary: Inflation

Inflation is the general rise in prices, which shrinks what each dollar buys. Compare any return or raise to inflation to see the real change. Money meant to last a long time generally needs to grow faster than inflation.

Step 7: What you should remember

Key takeaways: Inflation

Inflation = rising prices = each dollar buys less.
Real return ≈ your return minus inflation.
The Federal Reserve aims for about 2% inflation over the long run.
Long-term money usually needs to grow faster than inflation.

Key terms in this lesson

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Sources and further reading

Rules, rates, and official figures in this lesson are based on these sources. People and numbers in examples are hypothetical.

1.
Why does the Federal Reserve aim for inflation of 2 percent over the longer run? (opens in a new tab)
Board of Governors of the Federal Reserve System · federalreserve.gov
2.
Consumer Price Index (opens in a new tab)
U.S. Bureau of Labor Statistics · bls.gov
3.
CPI Inflation Calculator (opens in a new tab)
U.S. Bureau of Labor Statistics · bls.gov

Last checked September 2026: The Federal Reserve's long-run inflation goal (2%). Rules and numbers like these can change — check the official source before making a decision.

Cite this lesson

Financial Literacy Club. (2026, September). Inflation. https://learnwithflc.org/courses/money-fundamentals/inflation

Spot an error or an out-of-date number? Tell us and we'll fix it. Read our editorial standards.

Key terms in this lesson