Inflation

Inflation is the rate at which the general level of prices for goods and services rises, causing purchasing power to fall over time.

How Inflation is Measured

• Consumer Price Index (CPI): Tracks the average change in prices paid by consumers for a basket of goods and services
• Producer Price Index (PPI): Measures average changes in selling prices received by domestic producers
• Personal Consumption Expenditures (PCE): Measures price changes for all consumer purchases

Causes of Inflation

• Demand-Pull Inflation: Occurs when demand for goods and services exceeds supply
• Cost-Push Inflation: Results from increases in production costs
• Monetary Inflation: Caused by an expansion of the money supply

Effects of Inflation

• Reduced Purchasing Power: Money buys fewer goods and services over time
• Fixed-Income Challenges: People on fixed incomes may struggle as their money loses value
• Asset Revaluation: Some assets like real estate may increase in nominal value

Protection Strategies

• Inflation-Protected Securities: Such as TIPS (Treasury Inflation-Protected Securities)
• Real Assets: Investments in real estate, commodities, and other tangible assets
• Equity Investments: Stocks of companies that can pass increased costs to consumers