Inflation

Inflation is a general rise in prices that erodes the value of money. If 5 bought you lunch last year and no longer does, that gap is inflation. The number in your account has not shrunk — what it can buy has.

Central banks usually target around 2% a year. When prices stop rising, or fall, people postpone spending and the economy stalls, so mild inflation is considered healthy. The danger is in the speed, not the direction.

Inflation is dangerous because it quietly eats cash and deposits. If prices rise 3% while your savings pay 2%, your balance grows but your purchasing power falls 1% every year. Protecting the principal is not the same as protecting the value.

That is why people reduce cash and add assets that tend to rise with prices — equities, property, commodities. None of them is a guaranteed shield, though, so spreading across several beats betting on one.