Glossary
Inflation
Inflation is the general rise in prices over time, which reduces what each dollar can buy.
Even modest inflation compounds: at 3% a year, prices roughly double in 24 years, so a retirement lasting three decades can see the purchasing power of a fixed income cut by more than half. Inflation is measured by indexes such as the CPI, and it is the reason "real" (inflation-adjusted) returns are the ones that matter.
Why it matters in practice
Inflation is the quiet risk that makes "safe" assets unsafe over long horizons: cash and fixed payments hold their number while losing their value. It is a central reason long-term portfolios hold growth assets like stocks, whose returns have historically outpaced inflation, and why Social Security's inflation adjustment is one of its most valuable features.
Related terms: Real Return · Bond · Longevity Risk · Time Horizon · Compound Interest