The Fed's 2% inflation target is not a natural law — it's a policy decision. The target means: your cash loses approximately 2% of purchasing power every year by design. Over 30 years at 2%, $100 becomes $55 in purchasing power. This is intentional — moderate inflation incentivizes spending and investment over hoarding cash.

Who inflation benefits: borrowers (debt shrinks in real terms), asset owners (property and stock prices rise nominally), and governments (tax revenue rises with nominal income while fixed-rate debt becomes cheaper). Who inflation hurts: savers (cash erodes), workers whose wages lag inflation (most workers), and retirees on fixed incomes.

The CPI (Consumer Price Index) measures inflation — but it's imperfect. It excludes: housing prices (uses "owners' equivalent rent" instead), adjusts for "quality improvements" (a more expensive laptop counts as deflation if it's faster), and uses substitution effects (if beef prices rise, the CPI assumes you switch to chicken). Critics argue CPI systematically understates real inflation experienced by consumers. Alternative measures like the Chapwood Index suggest real inflation may be 2-3x the official CPI.

The 2022-2023 inflation spike (CPI above 9%) demonstrated that inflation's burden falls disproportionately on lower-income households — they spend a higher percentage of income on essentials (food, energy, housing) which inflated faster than the average. The wealthy, holding assets that appreciated, were largely insulated.