What inflation does to cash

If a broad set of prices rises, a dollar left in a drawer pays for less of ordinary life. Economists try to summarize that rise with an index. They build a basket, weight it by how people spend, and watch the basket’s cost. In the United States, the consumer price index is the famous version. Change the basket — a bigger apartment, a faster laptop — and the index changes. Serious people argue about those choices.

A general rise in prices and a growing money supply often travel together in explanations, and they are still not the same event. A shortage of one product can lift that product’s price without being inflation in the broad sense.

For an investor, the practical sentence is smaller: the percentage you see is nominal. Subtract the rise in prices, in a rough way, and you are closer to the change in what the money can buy. A gain that only keeps up with the basket did not make you richer in goods.