What Is Inflation?
Inflation is when prices rise over time, so each dollar buys a little less. If inflation is 3%, something that cost $100 last year costs about $103 now.
What causes inflation
- Too much money chasing too few goods.
- Rising costs, like oil or wages, passed on to customers.
- Expectations: if everyone expects higher prices, they push for higher wages and prices.
How inflation is measured
In the US, the main measure is the Consumer Price Index, which tracks the price of a typical basket of goods and services. The Federal Reserve aims for about 2% inflation a year.
How inflation affects your money
Cash loses buying power. At 3% inflation, $10,000 under a mattress buys about a quarter less after 10 years. That is why people invest rather than just save.
How inflation affects stocks
Mild inflation is usually fine for stocks, since companies can raise prices. High inflation tends to push interest rates up, which often hurts stock prices, especially for growth stocks.
See it in real companies
Open a company to see what it sells and how it makes money.