You can't escape inflation. You see it when you fill your tank with gas or stop at the grocery store. Prices are going up everywhere—and that's what inflation is, a general increase in the price of goods and services.

Inflation also means the erosion of your money's buying power. The $100 you tucked away 20 years ago and forgot about? It's only worth $64 today. Here's what you need to know about inflation and how to fight it.

Average price of a movie ticket¹

Inflation is the rate of increase in prices of goods and services across the board. It isn't just an increase in the price of one thing, like movie tickets. But there are other types of inflation:

• Hyperinflation is exactly what it sounds like: a period of extremely high inflation, with prices rising by 50% in a year, or doubling in 3 years.
• Deflation is basically the opposite of inflation, when prices are generally falling.
• And then there's the dreaded stagflation, a term coined in the 1970s when stubbornly high inflation coincided with high unemployment and little to no economic growth — stagnation + inflation. (Usually, when growth slows and unemployment rises, inflation naturally comes down. But not always.)

All of these are terrible for the economy and, luckily, all of them are rare. The following chart shows the interplay of inflation, unemployment and recessions since 1970:

A little inflation is an important part of a healthy economy. Rising prices can mean higher revenue and earnings for businesses, if they can raise prices to keep up with their costs. This can also be good for investors. For workers, inflation is tied to higher wages, which go right in your pocket. But when inflation goes up too fast or is unexpected, that can throw a wrench in the works.

Inflation is just one of the things that can disrupt the economy. But when it does, it can start a vicious cycle.

Inflation typically comes from one of three things: high demand from consumers and businesses; shortages of goods or services; and the expectation that inflation will continue.

In general, the inflation rate is measured by comparing the price of a list of goods and services from one month to the next. Usually when you hear about inflation, it is measured by the Consumer Price Index (CPI), which is calculated monthly by the Bureau of Labor Statistics.

But some people don't like the CPI because it doesn't accurately reflect increases in the cost of living. That's because people make substitutions when prices go up, maybe shopping sales more often, switching to store brands, or driving less. So the actual hit to your budget is slightly less than the inflation rate you see in headlines. (Consumers who prefer their name brands and better cuts of meat might quibble with this view.)

There are other ways to look at inflation:

• CPI minus food and energy ("Core" CPI): Food and energy prices are both extremely volatile. They can drive inflation higher (or lower) even when other prices aren't changing much. So economists look at this number to see what underlying prices are doing.
• Personal consumption expenditures (PCE): The PCE price index also measures changes in the prices consumers pay for goods, but unlike CPI, it does account for changing consumer spending habits, so it tends to be a little lower than CPI. It also measures all spending, not just consumer spending. So while CPI includes what consumers pay for health care, PCE also counts what insurance companies and employers pay. The PCE is the preferred inflation measure for the Federal Reserve, the nation's central bank.
• Producer price index (PPI): The PPI is a measure of wholesale inflation, or the prices paid to manufacturers of goods and services. The PPI tends to foreshadow consumer inflation, because as producer prices go up, those increases will likely be passed on to consumers.

Source: CPI and core CPI, US Bureau of Labor Statistics; PPI and PCE, US Bureau of Economic Analysis, retrieved from FRED, Federal Reserve Bank of St. Louis

That tells you the inflation rate for eggs. Apply that to 8,000 other items through a vastly more complicated formula that takes into account how much the average household spends on all these items in a given year, and you have the overall inflation rate.

Here you can see how the 8 main categories of spending are weighted to make up the CPI. Think of this as roughly what percentage of a typical household’s spending goes to each category.

If you spend differently—maybe you don’t drive much or you eat out a lot—your personal inflation rate may be different from the national inflation rate you usually hear.

But you can only do so much. It takes the government’s big gun, the Federal Reserve, to fight the impact of inflation on the economy. The US central bank aims to keep inflation to a target rate of about 2% (based on the personal consumption expenditures inflation rate, not the CPI). The Fed sets this target because it believes 2% inflation can help the economy maintain both maximum employment and a level of price stability.

Remember that $100 we talked about earlier? Now imagine that’s your retirement savings. If you just put your savings in a bank account, the $100,000 you’ve saved during your working career might only be worth $60,000—or even less.

For investors looking for opportunity, some types of investments have historically kept pace with inflation better than others. Dividend-paying stocks, TIPS (Treasury Inflation-Protected Securities), and I-bonds tend to shine when inflation is high. Real assets like real estate and commodities can also provide some protection from inflation as well as diversification benefits.