Inflation refers to the general rise in prices across an economy over time, which erodes the purchasing power of a given amount of money.
A simple illustration
If inflation runs at a modest rate over many years, the same amount of cash held without earning any return will buy meaningfully less in the future than it does today, even though the number on the bank statement hasn't changed.
Why this matters for saving
Cash sitting idle in a low- or no-interest account can lose real purchasing power over time if inflation outpaces the interest earned. This is part of the reasoning many people invest for long-term goals rather than holding all their savings in cash.
Inflation and investment returns
When evaluating investment returns, it can be useful to think in "real" terms — the return after subtracting inflation — rather than just the nominal, or stated, return.
