Inflation
The rate at which the general level of prices for goods and services rises, eroding purchasing power.
Definition
Inflation is the rate at which the general level of prices for goods and services is rising, and consequently, the purchasing power of currency is falling. It is measured by the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) index. The Federal Reserve targets a 2% annual inflation rate. Moderate inflation is considered normal and healthy for an economy, but high inflation (hyperinflation) can be devastating. Inflation affects investment returns — a 7% nominal return with 3% inflation yields only about 4% real return. Assets like stocks, real estate, and TIPS tend to outpace inflation over time, while cash and fixed-rate bonds lose purchasing power.
Related Tools
Related Terms
Deflation
A decrease in the general price level of goods and services, increasing the purchasing power of money.
EconomyConsumer Price Index (CPI)
A measure of the average change in prices paid by consumers for a basket of goods and services.
EconomyPurchasing Power
The quantity of goods and services that can be purchased with a unit of currency.