What is Inflation?

Inflation Eats Away at Purchasing Power

Inflation in economics is a relatively simple concept and represents the upward movement in the overall price of goods and services within the economy. It is captured as a numerical rate which will reflect the decline in purchasing power for a specific currency from previous periods. 

Simply put, it will cost you more dollars for a good or service than it did before. Depending upon the specifics, inflation can be viewed in both a positive and negative fashion.

Many Causes for Price Increases

There is no single factor entirely responsible for inflation as it can vary by sector or industry when it comes to goods and services produced. Some examples can include oil, grain, cooper, rubber, toothpaste, medical services or semiconductors. 

When there is an increase in the cost of production for inputs, there is a chance that cost gets passed onto the consumer in the final product. 

Inflation is typically measured in accordance with a basket of goods and the most common index to measure inflation is the Consumer Price Index (CPI).

Another contributing factor to inflation can be a demand shock or also known as too much money chasing too few goods. This is why too much liquidity (cash) in the economy can have a negative impact on your purchasing power.

Understanding inflation in full can be a complicated subject and sits at the center of debate for many economists. While sometimes viewed in a negative fashion, modest inflation shows that the economy is growing and healthy.

Use Equity to Fight Inflation

While inflation rates have fluctuated throughout history, one aspect remains constant and this is the fact that prices and goods have been increasing since they started tracking the metric. 

Historically, investing in equity has proven to be the single greatest hedge against inflation as it allows you to reap the rewards of a growing economy by increasing the value of your idle cash. 
This is accomplished through a concept known as the Time Value of Money along with The Wonders of Compound Return.