Inflation is defined as a sustained increase in the price of goods and services. Over time, inflation erodes the value of a nation’s currency. There are a variety of factors that influence inflation and arguments about its root cause.
For investors, inflation can mean continued profit as they add to their retirement portfolio.
In economics, inflation is a quantitative measure, one of quantity over quality of the speed at which the average costs for a standardized basket of goods increases over a specific period. Inflation measures the spending power of currency and most often will appear as a percentage.
Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. It is important because, all else being equal, inflation decreases the amount of goods or services you would be able to purchase.
A nation’s monetary authority, such as a central bank, will work to keep the rate of inflation within a boundary that keeps the economy running and encourages growth. Some level of inflation is necessary as it promotes spending which helps national economic growth.
The most common measurement tools used to rank inflation are the Consumer Price Index (CPI) that measures the weighted average a consumer pays for a standardized group of goods and is reported monthly by the Bureau of Labor Statistics (BLS). CPI measures finished products. And the Producer Price Index (PPI) it is a weighted average of prices for domestic producers at the wholesale level of production. It is also reported monthly by the BLS. PPI measures good at any stage along the production and output line.
Many different factors contribute to rising prices. When the overall demand for goods build, supply prices will rise. Increases in the cost of production—due to everything from growth in the cost labor to rises in the cost of raw commodities. Most consumers view inflation as an adverse situation. However, inflation does have a positive side when looked at from an investment standpoint.