Inflation
The pace at which prices rise. If inflation is 3%, something costing £100 today costs about £103 in a year, so cash loses buying power.
In plain English
Inflation measures how fast the general level of prices goes up. In the UK it is usually tracked by the Consumer Prices Index (CPI), which follows the price of a typical basket of goods and services.
A little inflation is normal. The Bank of England aims for 2% a year. When inflation runs much higher, it eats into the value of money and wages.
An everyday example
If a meal deal costs £4 and inflation is 5%, it would cost about £4.20 a year later. Cash sitting in an account paying 1% would be losing about 4% of its buying power each year.
Why it matters for investors
Inflation shapes interest-rate decisions, which move bond and share prices. It is also why keeping all your money in cash for decades can quietly cost you: the number stays the same but it buys less.
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Related terms
Education only, not financial advice. Examples are simplified and use illustrative numbers.