Inflation
Quick Answer
The rate at which the general level of prices for goods and services rises over time.
Understanding Inflation
What Causes Inflation: - Demand-pull: Too much money chasing too few goods - Cost-push: Rising production costs passed to consumers - Monetary: Central banks printing too much money
The Fed's Target: The Federal Reserve targets 2% annual inflation as optimal for economic health.
Measuring Inflation
Consumer Price Index (CPI) Measures price changes for a basket of consumer goods. The headline number includes everything; core CPI excludes food and energy.
Personal Consumption Expenditures (PCE) The Fed's preferred measure. Core PCE is closely watched for policy decisions.
Producer Price Index (PPI) Measures wholesale prices. Can be a leading indicator of consumer inflation.
Investment Implications
Rising Inflation: - Hurts bonds (fixed payments lose value) - Benefits commodities and real assets - Mixed for stocks (pricing power matters) - Typically strengthens gold
Fighting Inflation: When the Fed raises rates to combat inflation, it often triggers: - Stock market volatility - Higher bond yields - Stronger dollar