Inflation is the rate at which the general level of prices for goods and services rises over time, reducing the purchasing power of money. A 3% annual inflation rate means something costing $100 today will cost $103 next year.

How does inflation affect savings?

If your savings earn a return lower than the inflation rate, your money loses real purchasing power over time. For example, if inflation is 4% and your savings earn 2%, you effectively lose 2% of purchasing power per year.