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Investing Glossary

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Inflation

Inflation is a rise in prices, which can be translated as the decline of purchasing power over time. The rate at which purchasing power drops can be reflected in the average price increase of goods and services over some period of time. The rise in prices, which is often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods. Inflation is the rate at which prices for goods and services rise and is sometimes classified into three types: demand-pull inflation, cost-push inflation, and built-in inflation. The most commonly used inflation indexes to track current inflation levels are the Consumer Price Index and the Wholesale Price Index. Those with tangible assets, like property or stocked commodities, may like to see some inflation as that raises the value of their assets. While it is easier to measure the price changes of individual products over time, human needs extend beyond just one or two products. Individuals need a big and diversified set of products as well as a host of services for living a comfortable life. They include commodities like food, metal, fuel, utilities like electricity and transportation, and services like health care, entertainment, and labor. Inflation aims to measure the overall impact of price changes for a diversified set of products and services. This loss of purchasing power impacts the cost of living for the common public which ultimately leads to a deceleration in economic growth. The consensus view among economists is that sustained inflation occurs when a nation’s money supply growth outpaces economic growth. An increase in the supply of money is the root of inflation, though this can play out through different mechanisms in the economy.

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Supervest, Inc.

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