What Is Inflation?
Inflation is the rate at which the general level of prices for goods and services rises over time, reducing the purchasing power of money. Central banks like the U.S. Federal Reserve target low, stable inflation — typically around 2% annually.
What Causes Inflation?
- Demand-pull: Too much money chasing too few goods.
- Cost-push: Rising production costs (energy, labour) passed on to consumers.
- Monetary expansion: Excess money supply growth.
How Inflation Impacts Asset Classes
- Stocks: Mixed — companies with pricing power tend to outperform; growth stocks can suffer as future earnings are discounted more heavily.
- Bonds: Rising inflation erodes fixed coupon payments; bond prices fall.
- Cash: Loses real value over time in inflationary environments.
- Real assets: Commodities and real estate often serve as inflation hedges.
- Crypto: Bitcoin is sometimes called “digital gold” — though its inflation-hedge properties remain debated.
Protecting Your Portfolio
Diversification across asset classes, TIPS (Treasury Inflation-Protected Securities), and real assets can help mitigate inflation risk.
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