Inflation shrinks money's value.
Inflation is an overall increase in prices. This includes the cost of food, goods, services, housing and fuel. Inflation is two-sided because reduced buying power causes the value of money to drop. The inflation rate measures how fast prices rise over a certain period. The U.S. Bureau of Labor Statistics regularly calculates the Consumer Price Index (CPI) and uses it to define current inflation.
The Cost of Goods
The rate of inflation is measured by calculating the cost of a common basket of goods and services. Goods might include food, beverages, education, communication, housing, recreation, clothes, medical care and transportation.
The Cost of Fuel
Although fuel is a good, the effects of its price are particularly widespread. When the cost of fuel rises, almost every other item in the theoretical "basket of goods" also winds up costing more because of the increased cost of transporting goods. Rising fuel costs can also affect the cost of housing because of home energy expenses.
Sales and Manufacturing
Inflation is an increase in the price of goods. These goods can include the raw materials and machines that manufacturers use to produce their goods. Manufacturers may pass their cost increases on to consumers, which eventually raises the overall inflation rate.
Inflation and Retirement Savings
Inflation affects people's retirement because the money that they've saved throughout their lifetime is worth less than when they originally put it into savings. For example, a 30-year-old puts $1 in retirement savings in 1980. By 2010 that dollar, though still a dollar, might only be able to buy 50 cents worth of what it could buy 20 years earlier.
Investment
According to Donald Gerolamo of the website "OK Economics," rising inflation rates discourage investment in bonds that "take a long time to mature." Because of inflation, a bond at maturity may end up worth less than the initial investment. Stocks, on the other hand, are often a better investment choice when inflation rates are high because the returns can outpace inflation.
