Inflation is the rate at which prices for goods and services rise over time, which means each dollar buys a little less.
Inflation is usually quoted as a yearly percentage: if inflation is 3%, a basket of things that cost $100 a year ago costs about $103 today. In the US it is measured mainly by the Consumer Price Index (CPI) and the PCE price index. A little inflation (the Federal Reserve targets 2% a year on PCE) is considered normal in a growing economy; high inflation erodes savings and paychecks.
Why it matters to you
If your pay rises more slowly than inflation, your real income falls. Inflation also drives interest rates: when it runs hot, the Fed tends to keep rates high, which makes mortgages, car loans and credit cards more expensive.