If it feels like your dollar doesn’t go quite as far as it used to, you aren’t imagining it. The reason is inflation, which describes the gradual rise in prices and slow decline in purchasing power of your dollars over time. The impact of inflation may seem small in the short term, but over the course of years and decades, inflation can drastically erode the purchasing power of your savings. Inflation reduces the real rate of return on investments so if an investment earned 6 percent for a 12-month period, and inflation averaged 1.5 percent over that time, the investment’s real rate of return would have been 4.5 percent.  It puts purchasing power at risk. When prices rise, a fixed amount of money has the power to purchase fewer and fewer goods.