Inflation means that prices go up over time. So the money you have today will buy less stuff in the future.
Example: Let's say a chocolate bar costs $1 today. If there's inflation, next year that same chocolate bar might cost $1.10.
That means your dollar lost some value — it can't buy as much anymore.
Why does this happen?
There are a few common reasons:
Effects of inflation
A low, stable inflation rate typically coincides with economic growth.
Higher inflation increases the nominal cost of goods and services. When wage growth lags inflation, purchasing power decreases for households whose income doesn’t keep up.
Example: A $1,000 position growing at 8% nominally, in a year with 5% inflation, yields a real (inflation-adjusted) return of approximately 3%.
The real return is the nominal return minus the inflation rate — this is how economists describe the purchasing-power change of an investment over time.