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 Federal Reserve and the European Central Bank target a moderate level of inflation (typically around 2% per year) as a sign of a healthy, growing economy. When inflation rises above target, central banks raise interest rates to cool spending and borrowing. When it falls below target or turns negative (deflation), they cut rates to stimulate the economy. For investors, inflation matters because it affects the real return on every asset class: bonds lose value in real terms when inflation runs high, equities with strong pricing power tend to hold up better, and cash is silently eroded. A company's ability to raise prices without losing customers, its pricing power, is the clearest defence against inflation.