It's the word that returns with every receipt: inflation. We hear it on the news and see it at the supermarket, but what exactly does it mean, and why do central banks hunt it so relentlessly? This guide explains everything you need to know, in a way that stays valid over time.

A simple definition

Inflation is the general and sustained rise in the prices of goods and services. Its direct consequence is that, with the same amount of money, over time you buy less: purchasing power falls. Inflation of 3% means that what costs €100 today will on average cost €103 next year.

How it's measured

It's measured by comparing the cost of a representative "basket" of goods and services (food, housing, transport, energy, leisure) with a year earlier. In Europe the official index is the HICP (Harmonised Index of Consumer Prices), calculated by Eurostat. A distinction is often made between headline inflation (total) and core inflation, which excludes the most volatile items like energy and fresh food to capture the underlying trend.

Where it comes from

  • Demand-pull: when demand for goods exceeds supply, prices rise.
  • Cost-push: when production costs rise — energy, raw materials, wages — firms pass them on to prices.
  • Expectations: if everyone expects rising prices, firms and workers adjust prices and wage demands, fuelling a spiral.

Why the target is 2%

The major central banks — the ECB for the eurozone, the Federal Reserve for the US — aim for inflation around 2%. Why not zero? A little inflation lubricates the economy, encourages spending and investment, and keeps away the opposite spectre: deflation (falling prices), which can freeze consumption and growth. Too much, on the other hand, erodes savings and creates uncertainty.

Chart: how 2% and 5% inflation erode the real value of €100
Illustrative Hub Finanza chart: real value of €100 today under constant inflation.

As the chart shows, the difference between 2% and 5% is enormous over the long run: that's why leaving all your savings idle in an account, earning nothing, amounts to silently losing value.

A snapshot (mid-2026)

For a concrete reference: in June 2026 eurozone inflation was around 2.8% and US inflation around 3.5% — both above the 2% target, which explains central banks' caution. These values change month to month: what stays constant are the mechanisms that govern them.

The bottom line

Inflation is the pace at which money loses value. Measuring it, understanding its causes and knowing its target (2%) helps you read the economy and make better decisions — starting with not letting your savings be eroded while doing nothing.

Disclaimer: this article is for information and educational purposes only and does not constitute financial advice. Any investment decision should be assessed against your own circumstances and, if needed, with a qualified professional.