Inflation, explained

Inflation is when prices across the economy rise over time. One price going up isn't inflation. Inflation is when groceries, rent, gas, haircuts and phone plans all tend to cost more, year after year.

The government tracks it with the Consumer Price Index (CPI), which follows the prices of a big basket of things people buy. If the CPI is 3% higher than a year ago, inflation is 3%: on average, what cost $100 last year costs $103 now.

Inflation shrinks your purchasing power, which is how much your money can buy. If your pay goes up 2% but prices go up 4%, you can afford less than before, even though your paycheck got bigger. The same goes for savings. Cash sitting in a drawer loses value every year that prices rise, which is why people try to earn interest that beats inflation.

What causes it? Usually one of two things. Prices get pulled up when people want to buy more than businesses can make (lots of demand), or pushed up when things get more expensive to make, like when oil or chips cost more (higher costs).

The Federal Reserve aims to keep inflation around 2% a year. When it runs hotter, the Fed usually raises interest rates. Borrowing gets more expensive, people and businesses spend a little less, and price increases slow down.

Watch for it in the news: the monthly CPI report, gas prices, grocery bills, and companies saying they're raising prices because their own costs went up.