Inflation

Inflation is the rate at which the general price level rises, meaning each dollar buys a little less over time. Modest inflation is normal; the long-run U.S. average has hovered around 2 to 3% a year, though it varies and has spiked in some periods.

For planning, inflation is why future dollar amounts look alarmingly large and why today's-dollar (real) views are often more intuitive. A budget that looks comfortable now needs to grow with inflation for decades in retirement. Some costs — notably healthcare and college — have historically risen faster than general inflation, which is why good plans model them with their own higher rates rather than a single blended number.

The antidote in a portfolio is real growth: investments that outpace inflation over time. Cash loses purchasing power to inflation; diversified investments have historically outpaced it, which is the core argument for investing rather than holding everything in cash.