# Inflation > Inflation is the rate at which prices rise over time. Learn its causes, how it is measured, how central banks respond and how it affects stocks, bonds and gold. Source: https://learn.tradelabsai.com/macro/inflation/ Track: Economics and Macro · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Inflation", https://learn.tradelabsai.com/macro/inflation/ Inflation is the general rise in prices across an economy over time, which reduces the purchasing power of money. A little inflation is considered normal and even healthy; most major central banks target about 2% a year. Too much inflation erodes savings, distorts decisions and forces central banks to raise interest rates sharply. Too little, or falling prices (deflation), can trap an economy in weak growth. For traders, inflation is one of the most important macro drivers of bonds, currencies, stocks and commodities. ## Measuring inflation | Measure | Covers | Lesson | |---|---|---| | Consumer Price Index (CPI) | Prices paid by urban consumers | [CPI and PCE](https://learn.tradelabsai.com/macro/cpi-and-pce/) | | Personal Consumption Expenditures (PCE) price index | Broader consumer spending; the Fed's preferred measure | [CPI and PCE](https://learn.tradelabsai.com/macro/cpi-and-pce/) | | Producer Price Index (PPI) | Prices received by producers | Early signal of cost pressures | | Core measures | Exclude volatile food and energy | Better gauge of underlying trends | | Breakeven inflation | Market implied, from TIPS vs Treasuries | [Treasury Bills, Notes and Bonds](https://learn.tradelabsai.com/bonds-credit/treasury-bills-notes-and-bonds/) | ``` inflation rate = (price index this year / price index last year) - 1 ``` ## What causes inflation | Type | Cause | Example | |---|---|---| | Demand pull | Spending grows faster than the economy can produce | Strong demand after stimulus | | Cost push | Higher production costs passed on to consumers | Energy price spikes | | Built in (wage price spiral) | Workers expect inflation and demand higher wages, which raises prices | 1970s | | Monetary | Money supply grows much faster than output | Hyperinflations | The 2021 to 2023 inflation surge combined several causes: strong demand from fiscal stimulus, supply chain disruptions after the pandemic and energy price shocks after Russia invaded Ukraine. US CPI inflation peaked at 9.1% year over year in June 2022, the highest since 1981. ## How central banks respond Central banks fight high inflation mainly by raising interest rates, which slows borrowing, spending and hiring. The Federal Reserve raised its policy rate from near zero in early 2022 to a range of 5.25% to 5.50% by July 2023, one of the fastest tightening cycles in decades. See [The Federal Reserve and the FOMC](https://learn.tradelabsai.com/macro/the-federal-reserve-and-the-fomc/) and [Interest Rates](https://learn.tradelabsai.com/macro/interest-rates/). ## Inflation and markets | Asset | Typical effect of rising inflation | |---|---| | Nominal bonds | Prices fall as yields rise; fixed coupons lose purchasing power. See [Duration](https://learn.tradelabsai.com/bonds-credit/duration/) | | Inflation linked bonds (TIPS) | Principal adjusts with inflation; partial protection | | Stocks | Mixed; high and rising inflation usually hurts valuations, especially growth stocks | | Commodities | Often rise; commodities are part of the inflation | | Gold | Mixed; depends heavily on real interest rates. See [Gold](https://learn.tradelabsai.com/commodities/gold/) | | Currencies | Higher inflation can weaken a currency unless rates rise to compensate | | Cash | Loses purchasing power unless rates exceed inflation | **Example: 2022 in markets** In 2022, with inflation high and the Fed raising rates rapidly, the S&P 500 fell about 19% and broad US bond indices fell about 13%, an unusual year in which both stocks and bonds lost money. A traditional 60/40 portfolio had one of its worst years in decades. Commodities, especially energy, rose strongly. See [Correlation Management](https://learn.tradelabsai.com/portfolio/correlation-management/). ## Real returns ``` real return ≈ nominal return - inflation ``` A 5% return with 3% inflation is a real return of about 2%. Investors care about real returns because they measure changes in purchasing power. See [Measuring Returns and CAGR](https://learn.tradelabsai.com/portfolio/measuring-returns-and-cagr/). ## Deflation Falling prices sound good but can be harmful: consumers delay purchases, debts become heavier in real terms and economic activity can slow. Japan struggled with mild deflation for much of the period from the late 1990s to the 2010s. ## Frequently asked questions ### What is inflation? The general rise in prices across an economy over time, which reduces the purchasing power of money. ### Why do central banks target 2% inflation? A low, stable rate gives room to cut rates in downturns, reduces the risk of deflation and allows for measurement bias, without the costs of high inflation. ### How does inflation affect stocks and bonds? Rising inflation usually hurts nominal bonds and can lower stock valuations, especially when it forces central banks to raise rates sharply. Next, learn the main inflation reports in [CPI and PCE](https://learn.tradelabsai.com/macro/cpi-and-pce/). ## Continue learning - Next lesson: [CPI and PCE](https://learn.tradelabsai.com/macro/cpi-and-pce/) - Previous lesson: [GDP](https://learn.tradelabsai.com/macro/gdp/) - Related: [GDP](https://learn.tradelabsai.com/macro/gdp/): GDP measures the total value of goods and services an economy produces. Learn how it is calculated, real vs nominal GDP, release timing and how markets react. - Related: [CPI and PCE](https://learn.tradelabsai.com/macro/cpi-and-pce/): CPI and PCE are the main US inflation measures. Learn how they differ, headline vs core, supercore, release timing and how traders react to inflation surprises. - Related: [Interest Rates](https://learn.tradelabsai.com/macro/interest-rates/): Interest rates are the price of money and a key driver of asset prices. Learn policy vs market rates, real rates and how rates move stocks, bonds and currencies. - Related: [Central Banks Explained](https://learn.tradelabsai.com/macro/central-banks-explained/): Central banks set interest rates and manage money to control inflation and support growth. Learn their mandates, policy tools, communication and market impact. - Related: [Treasury Bills, Notes and Bonds](https://learn.tradelabsai.com/bonds-credit/treasury-bills-notes-and-bonds/): US Treasuries are bills, notes and bonds issued by the federal government. Learn their maturities, how auctions work, TIPS, how they trade and why they matter. - Related: [Gold](https://learn.tradelabsai.com/commodities/gold/): Gold is a safe haven and inflation hedge driven by real rates, the dollar and central banks. Learn gold futures, ETFs, key drivers and how traders approach gold.