WHAT IS INFLATION?
Learn even more about this topic with the Encyclopedia of Personal Finance™
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 that
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 levels. The extent to which the price
levels of these goods increase from period to period is the inflation for that
Now that we have a general understanding
of inflation, let's look at how inflation can wreak havoc with our investments
in bonds and other fixed-income securities.