This also means that the compounded interest rate is higher. The effective annual interest rate during the two years rises to 10.5 percent, in the case of compounding. Inflation An increase in price levels, expressed as an annual rate. The PPI measures inflation at the producer level, and is a harbinger of higher prices for consumers. The CPI is a price index of consumer inflation that calculates monthly inflation rates based on extensive surveys of changes in prices for such consumer goods as clothes, food, transportation, and housing.
Inflation erodes the purchasing power of income and investments.
As prices increase, the purchasing power of a dollar declines. Like compounded interest, inflation grows exponentially.