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What Is Inflation, and Why Should I Care?

Here's how it works, and how it affects your life.

Inflation is the rate at which prices increase, as Taylor Tepper explains in this edition of Dumb Money. For example, if the inflation rate is 2%, that means that prices, on average, are rising 2% annually. The same bag of groceries that cost you $100 a year ago would run you $102 today.

The Federal Reserve uses interest rates to try and keep inflation at a moderate level, usually in the low single digits. And right now, the Fed is trying to aim for an inflation rate of 2%.

Too much inflation is really bad. Ask your parents about the late 1970s.

Deflation — when prices, on average, drop year after year — might sound really great. But deflation is actually very bad.

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