Annual Percentage Yield (APY) is the annualized rate of return from an investment, factoring in compound interest that accrues or grows with the balance. Compound interest includes interest earned from the initial deposit, plus the interest earned on that interest.
XEP has a 3% annual reward rate (APY) based on the block reward schedule. The total rate of inflation on the whole blockchain is less than 3% APY, because not all XEP holders participate in the staking mechanism. The only way XEP holders can earn interest is by using an official XEP Desktop Wallet and keep it unlocked.