Definition
The general rise in prices over time, which means each dollar buys a little less than before.
What it means
Inflation is the rate at which prices for goods and services rise across the economy. The Bureau of Labor Statistics measures it with the Consumer Price Index (CPI), and the Federal Reserve aims for inflation of 2 percent over the longer run, measured by the price index for personal consumption expenditures. Inflation matters for household planning: money in an account earning less than the inflation rate loses buying power, and fixed incomes buy less each year. Some payments rise with inflation, such as Social Security benefits through the yearly cost-of-living adjustment, I bond interest and many IRS tax brackets and limits. Wages may or may not keep pace. When comparing prices across years, economists adjust for inflation to show real, rather than nominal, changes.
Example
At 3% yearly inflation, something that costs $100 today costs about $134 in 10 years. Savings earning 1% a year lose roughly 2% of buying power each year.
Illustrative numbers only. Your situation will differ.