Inflation

Inflation is a sustained rise in the overall price level across an economy, not a jump in the price of one item. It is usually measured by the annual percentage change in a consumer price index, which tracks the cost of a representative basket of goods and services. Inflation can come from demand outrunning an economy's capacity, from rising costs such as energy or wages, and from expectations: if people expect higher prices, they ask for higher pay and firms raise prices in advance. A general fall in prices is called deflation.

For savers and investors, inflation is a steady tax on money that is not growing. Cash earning less than inflation loses purchasing power, and bonds with fixed payments lose real value if inflation turns out higher than expected. Over long periods, shares and property have tended to keep pace with inflation better than cash, though not reliably over short spans. Many central banks aim for low, stable inflation, commonly around 2% a year, because both high inflation and deflation damage economic decision-making. The figures that matter to investors are real returns, after inflation.