Inflation

Inflation is when the prices of everyday things—groceries, gas, rent—go up over time, so your money buys less than it used to. You'll hear about it constantly in financial news because it directly affects your purchasing power and how much your savings are actually worth. The Federal Reserve (America's central bank) tries to keep inflation steady, usually around 2% per year. For example, if a coffee costs $5 today and inflation runs at 5% annually, that same coffee might cost $5.25 next year. As an investor, inflation matters because it eats into your returns—if your stock gains 6% but inflation is 4%, you've really only gained 2% in real value.