Inflation

A general and sustained increase in the price level of goods and services across an economy, eroding purchasing power over time.

Inflation is measured by tracking a basket of goods and services over time. The Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) price index are the two primary US gauges. The Federal Reserve targets 2% annual PCE inflation as consistent with price stability — low enough to avoid economic distortion, high enough to buffer against deflation.

Inflation has multiple causes. "Demand-pull" inflation occurs when demand outpaces supply — too many dollars chasing too few goods. "Cost-push" inflation results from rising input costs being passed to consumers. "Built-in" inflation happens when rising wages and rising prices reinforce each other. The 2021–2023 US inflation surge combined all three: stimulus-charged demand, supply-chain constraints, and eventually tight labor markets pushing wages higher.

For investors, inflation erodes real returns on fixed-income assets. Equities offer partial inflation protection since companies can raise prices, but high inflation also forces rate hikes that compress valuations. Real assets — real estate, commodities, TIPS — tend to outperform during high-inflation regimes.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.