Simply put, inflation is an increase in prices of goods/services and the subsequent fall in the purchasing power of money.
So, if inflation is 1%, this means that we would need to spend 1% more to buy the exact same things we bought 12 months ago. This is why your grandfather was able to buy a can of coke for 5 cents. It’s also why he was probably happily getting paid around $0.75/hour.
How Do We Measure Inflation?
The most significant measures of inflation are the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). They examine the prices of hundreds of things we commonly spend our money on. They look at things like bread, milk, gas, etc. and track how their prices have changed over time.
Inflation is arguably one of the most important issues in economics – it influences everything from the rate we pay on our mortgages to the level of pensions/benefits.
To learn more about inflation, head over to Wall Street Survivor.