Inflation — Why Cash Loses Value Over Time

Inflation is the rate at which prices rise and purchasing power falls. At 3% inflation, a dollar today buys only 74 cents worth of goods in 10 years.

Key inflation measures:

CPI (Consumer Price Index) — tracks price of a basket of consumer goods; most cited measure

PCE (Personal Consumption Expenditures) — Federal Reserve's preferred measure

Core inflation — excludes volatile food and energy prices

Historical US inflation:

Average: ~3% per year over 100 years

1970s: 10%+ per year (stagflation)

2021–2022: peaked at 9.1% (CPI)

Fed target: 2% per year

Inflation's impact on investments:

Cash in savings account: loses purchasing power if return < inflation

Bonds: prices fall when inflation rises

Stocks: historically outpace inflation over long term

Real estate: generally inflation-resistant (rents and values rise)

TIPS (Treasury Inflation-Protected Securities): indexed to inflation

Real return = Nominal return − Inflation rate

10% stock return during 3% inflation = 7% real return

Reference:

Wikipedia: Inflation

https://en.wikipedia.org/wiki/Inflation