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A sustained increase in the general price level of goods and services in an economy, reducing the purchasing power of money over time.
Inflation is measured by indices like the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) index. The Federal Reserve targets 2% annual inflation as consistent with a healthy economy. At 3% inflation, prices double roughly every 24 years. Moderate inflation encourages spending and investment (since holding cash loses value), but high inflation erodes purchasing power and creates economic uncertainty. Investments that have historically outpaced inflation include stocks (averaging 7-10% nominal returns), real estate, and Treasury Inflation-Protected Securities (TIPS).