Watch-it-Wednesday: What is Inflation?

You've probably heard the term "inflation" before, but do you really have a grasp on what it means and how it affects you and your financial situation?

"Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service. 

The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year. After inflation, your dollar can't buy the same goods it could beforehand. " -Investopedia

Think about your trips to the grocery. Year after year, you've probably begun to notice that you're piling way less in your cart than in the past, and paying just as much, if not more for it. At many companies, raises are based on the increase in the cost of living. If your wages rise along with inflation, then you shouldn't have to alter your lifestyle too much. The real trouble comes if inflation rises at a quicker pace than your wages.

On a more positive note, inflation typically signals that the economy is growing.

Find out even more about inflation here.