What does a 3% inflation rate mean?

Question

Eg. If a basket of goods costs $100 today, does it mean next year it will cost $103, and the year after $106, then $109 etc.?

Answer 1

not quite. assuming the inflation rate holds at 3%, the price increase for the first year is $100*1.03=$103. The second year price level is $100*1.03^2=$106.09. In the third year, the price level will be $100*1.03^3=$109.27.

In general, the price level in a given year is given by:
the product of $1*(1+i) for i=0 to n where i is the inflation rate in year i.

Answer 2

3% right now. Today it's $103, last period was $100. Yes, it's a leading indicator. But that doesn't mean it is expected to stay constant for the next few years.