What does "inflation" measure?

Inflation specifically measures the rate at which the general level of prices for goods and services rises, which in turn erodes purchasing power. When inflation occurs, each unit of currency buys fewer goods and services, reflecting a decrease in the purchasing power of money. This phenomenon can significantly impact consumers, as they may find that their income does not stretch as far when prices increase.

Understanding inflation is critical for both personal financial planning and broader economic forecasting. It informs decisions related to interest rates, investments, and savings, as rising prices can affect everything from the cost of living to the returns on investments. Therefore, recognizing inflation's role in the economy is essential for making informed financial choices.