What Is Inflation?

A great economic bane in the 1970s, a phantom looming over fiscal policy at the turn of the century. We've all heard about inflation, but what exactly is it?

Inflation is the rate of increase in price levels of goods and services in the economy. When the prices of many of the goods and services we purchase rise, we have inflation. Inflation is not considered harmful to the economy as long as it is held under control. However, there have been a few instances in our recent history when inflation became a problem for our economy—most notably in the 1970s when double-digit inflation grew faster than most people's income.

One measure of inflation is the Consumer Price Index (CPI). The CPI takes a representative basket of goods in our economy and tracks their price level. The extent to which the price level of these goods increases from period to period is the inflation for that period.

The value-robbing influence of even low rates of inflation is a key consideration of your long-term investment strategy.

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