Inflation

AAA

DEFINITION of 'Inflation'

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

INVESTOPEDIA EXPLAINS 'Inflation'

As inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year.

Most countries' central banks will try to sustain an inflation rate of 2-3%.

For further reading on this subject, check out the Inflation Tutorial

VIDEO

Loading the player...
RELATED TERMS
  1. Biflation

    The simultaneous existence of inflation and deflation in an economy. ...
  2. Hyperdeflation

    An extremely large and relatively quick level of deflation in ...
  3. Inflation Accounting

    Special accounting techniques, which can be used during periods ...
  4. Inflation Protected

    The types of investments that provide protection against inflation ...
  5. Inflation Trade

    A method of investing that seeks to profit from an overall increase ...
  6. Inflation Hedge

    An investment that is considered to provide protection against ...
RELATED FAQS
  1. What external factors can influence EBITDA margins?

    Companies often experience changes in their earnings before interest, taxes, depreciation and amortization (EBITDA) margins ... Read Full Answer >>
  2. What does a sample plan using the 4% retirement rule look like?

    The 4% retirement rule is often used by financial planners to set the amount that a retiree can withdraw annually from an ... Read Full Answer >>
  3. How can bond yield influence the stock market?

    Bond yields influence the stock market in different ways at different times. Investors and traders need to be aware of economic ... Read Full Answer >>
  4. How do I calculate the rule of 72 using Matlab?

    In finance, the rule of 72 is a useful shortcut to assess how long it takes an investment to double given its annual growth ... Read Full Answer >>
  5. What economic indicators should an investor in the aerospace sector consider?

    The economic indicators that investors in the aerospace sector should consider are economic growth, interest rates and inflation. ... Read Full Answer >>
  6. What factors are the primary drivers of share prices in the oil and gas sector?

    The primary drivers of share prices in the oil and gas sector are energy prices and economic growth. Stock prices in the ... Read Full Answer >>
  7. How does the velocity of M2 money supply change?

    According to economic theory, the velocity of money is the number of times a unit of currency changes hands over a set period ... Read Full Answer >>
  8. What is the relationship between equity spot prices, dividends, and future stock ...

    The relationship between equity spot prices, dividends and future stock prices is straightforward in the near-term. The difference ... Read Full Answer >>
  9. Does raising the minimum wage increase inflation?

    There are conflicting views on whether raising the minimum wage increases inflation. Tied to this is the question of what ... Read Full Answer >>
  10. What economic indicators are important to consider when investing in the chemicals ...

    The most important economic indicators to consider when investing in the chemicals sector are economic growth, interest rates, ... Read Full Answer >>
  11. What are the primary factors that drive share prices in the chemicals sector?

    The primary factors that drive share prices in the chemicals sector are interest rates, inflation, economic growth and earnings. ... Read Full Answer >>
  12. What makes the chemicals sector attractive to value investors?

    The chemicals sector is attractive to value investors because it is a capital-intensive sector that can become grossly undervalued ... Read Full Answer >>
  13. What economic indicators are important to monitor when investing in the insurance ...

    Inflation and interest rates are the best economic indicators to monitor when investing in the insurance sector. Unlike with ... Read Full Answer >>
  14. Under what circumstances might a merchant turn toward using a banker's acceptance?

    According to Keynesian economic theory, several factors can lead to a change in the marginal propensity to consume, including ... Read Full Answer >>
  15. How is the Macaulay duration related to fixed income markets?

    Monetary policy influences the Fisher effect because it determines the nominal interest rate. The Fisher effect is an economic ... Read Full Answer >>
  16. What option strategies can I use to earn additional income when investing in the ...

    A risk-averse investor should build his retirement portfolio by putting together a well-diversified portfolio and then regularly ... Read Full Answer >>
  17. How do changes in interest rates affect M2?

    Changes in interest rates have a direct effect on M2. In fact, expanding or contracting the M2 money supply is one of the ... Read Full Answer >>
  18. If markets give information on value through price, how can nominal values be out ...

    Nominal values may differ from market values or real values for many reasons. Inflation may continually increase the nominal ... Read Full Answer >>
  19. Is the nominal value of a security ever also the real value?

    Nominal value is the face value of a consumer good or service. Real values compare the values of different goods and services ... Read Full Answer >>
  20. How can an investor reduce interest rate risk?

    Investors can reduce interest rate risk with forward contracts, interest rate swaps and futures. Investors may desire reduced ... Read Full Answer >>
  21. What impact does inflation have on the time value of money?

    The impact that inflation has on the time value of money is that inflation decreases the value of a dollar over time. The ... Read Full Answer >>
  22. How did the Volcker Rule affect investment banks, and how does this lower the chances ...

    The Volcker Rule affected investment banks by curtailing their ability to engage in certain types of trading. Specifically, ... Read Full Answer >>
  23. How can stock dividends provide protection against inflation?

    Stock dividends protect against inflation by providing tangible returns that supplement capital returns from rising stock ... Read Full Answer >>
  24. How does inflation affect a company's short-term investments?

    Inflation marginally erodes a company's short-term investments. Short-term investments are typically ultra-safe liquid assets, ... Read Full Answer >>
  25. What can cause the rate of return to be negative?

    Several factors can cause an investment to have a negative rate of return. Poor performance of a company or companies, turmoil ... Read Full Answer >>
  26. What is the difference between fiat money and legal tender?

    Fiat money does not have any intrinsic value. What value it has depends on public confidence in the currency's issuer. Legal ... Read Full Answer >>
  27. Is fiat money more prone to inflation than commodity money?

    The value of fiat money is based largely on public faith in the issuer. Commodity money's value is based on the material ... Read Full Answer >>
  28. How does float affect the nation's money supply?

    Federal reserve float is the overestimation of money in the nation's banks that results from checks that have not yet cleared. ... Read Full Answer >>
  29. What happens when inflation and unemployment are positively correlated?

    Positive correlation between inflation and unemployment creates a unique set of challenges for fiscal policymakers. Policies ... Read Full Answer >>
  30. What are the implications of a high Federal Funds Rate?

    A high federal funds rate discourages banks from borrowing from one another, which tightens the money supply. Raising the ... Read Full Answer >>
  31. What are some different kinds of expansionary policy?

    Expansionary policy is a macroeconomics strategy that seeks to stimulate the economy by expanding the money supply. When ... Read Full Answer >>
  32. Should investors worry about the budget deficit?

    Investors should be very concerned about the U.S. federal budget deficit, but primarily so in terms of how it relates to ... Read Full Answer >>
  33. What is the difference between real and nominal interest rates?

    A nominal interest rate is the interest rate that does not take inflation into account. It is the interest rate that is quoted ... Read Full Answer >>
  34. What are the main factors that drive share prices in the financial services sector?

    The financial services sector comprises businesses such as large banks, credit services companies, asset management companies, ... Read Full Answer >>
  35. What economic indicators are most useful when investing in the metals and mining ...

    The metals and mining sector often moves inversely with the broader market and the U.S. dollar. When stock markets are up ... Read Full Answer >>
  36. Is real GDP a better index of economic performance than GDP?

    Real GDP is a much better index for expressing the output of an economy, as it takes into account the fluctuating value of ... Read Full Answer >>
  37. What techniques are most useful for hedging exposure to the metals and mining sector?

    The metals and mining sector is largely counter-cyclical, meaning it outperforms the market during bad economic times but ... Read Full Answer >>
  38. How does the price of oil affect Russia's economy?

    During the second half of 2014, Americans celebrated a rapid decline in the price of oil and gas. Cheap oil has a similar ... Read Full Answer >>
  39. How does inflation affect the exchange rate between two nations?

    The rate of inflation in a country can have a major impact on the value of its currency and the rates of foreign exchange ... Read Full Answer >>
  40. What causes negative inflation or deflation?

      Deflation, or negative inflation, happens when prices fall because the supply of goods is higher than the demand for those ... Read Full Answer >>
  41. Does inflation favor lenders or borrowers?

      Inflation can benefit either the lender or the borrower, depending on the circumstances. If wages increase with inflation, ... Read Full Answer >>
  42. What methods can the government use to control inflation?

      Inflation is when the economy grows due to increased spending. When this happens, prices rise and the currency within the ... Read Full Answer >>
  43. What's the difference between hyperinflation and inflation?

    In the world of economics, inflation is a term that gets thrown around every time the price of certain goods or services ... Read Full Answer >>
  44. What economic indicators do agriculture investors need to watch?

    Agriculture investors should pay close attention to the commodity data and statistics related to the production, supply and ... Read Full Answer >>
  45. How does the Bureau of Labor Statistics determine the Consumer Price Index (CPI)?

    The Consumer Price Index (CPI) is determined by tracking price changes in a market basket of consumer goods and services ... Read Full Answer >>
  46. Is there a correlation between inflation and house prices?

    There is a correlation between inflation and house prices - in fact there are correlations between inflation and any good ... Read Full Answer >>
  47. What is the difference between inflation and stagflation?

    Inflation is a term used by economists to define broad increases in prices. Inflation is the rate at which the price of goods ... Read Full Answer >>
  48. What is the relationship between oil prices and inflation?

    The price of oil and inflation are often seen as being connected in a cause and effect relationship. As oil prices move up ... Read Full Answer >>
Related Articles
  1. Economics

    Can Investors Trust Official Statistics?

    The official statistics in some countries need to be taken with a grain of salt. Find out why you should be skeptical.
  2. Bonds & Fixed Income

    Coping With Inflation Risk

    Inflation is less dramatic than a crash, but it can be more devastating to your portfolio.
  3. Home & Auto

    How Inflation Has Affected The Price Of Cars

    As time has passed, have car prices gotten reasonably more expensive or gone above inflation?
  4. Investing Basics

    How Inflation Policy Affects You

    The Fed estimates a long-term goal of 2% inflation for the near future. Learn how that'll impact you.
  5. Economics

    Inflation And Economic Recovery

    Inflation impacts the costs of every facet of the economy. Discover how it can help or hinder the economic recovery.
  6. Bonds & Fixed Income

    Curbing The Effects Of Inflation

    Your investments suffer when general price levels rise. Learn how you can control the damage with IPSs.
  7. Economics

    What You Should Know About Inflation

    Find out how this figure relates to your investment portfolio.
  8. Options & Futures

    5 Inflation-Beating Bond Picks

    Look beyond traditional bonds when planning long-term. The alternatives can be extremely rewarding.
  9. Fundamental Analysis

    Protect Your Portfolio Against Inflation And Deflation

    Inflation and deflation are opposite sides of the same coin. When both are threatening, here's what to do to keep your portfolio safe.
  10. Fundamental Analysis

    How To Construct A High-Risk Portfolio

    Over time, intelligent and disciplined risk-seeking behavior can produce substantially above-average returns.

You May Also Like

Hot Definitions
  1. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  2. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  3. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  4. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  5. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  6. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!