Inflation is one of those words that gets thrown around a lot, but a lot of people don’t really know the meaning of it. Fortunately, the basic concept of inflation isn’t hard to grasp.

Inflation is a general increase in prices over time.

From the example above, we can see that the price for the total “basket of goods” (pizza, candy, and burger) increased from $10 to $12 in a year, which implies the inflation rate of 20%.

Typically, the Federal Reserve is targeting inflation rate at around 2 – 3% per year through its monetary policies.