Inflation
The rate at which the general level of prices for goods and services rises over time, eroding the purchasing power of money and affecting real investment returns.
Inflation means that over time the same amount of money buys less. If inflation runs at 3% per year, something that costs 100 today will cost 103 next year. For investors, this means that simply holding cash is a losing strategy—your savings lose purchasing power every year.
This is one of the most compelling reasons to invest. To preserve and grow real wealth, your investments need to earn a return that exceeds inflation. Historically, equities have delivered returns well above inflation over long periods, while cash and short-term bonds have sometimes barely kept pace.
Central banks such as the European Central Bank or the US Federal Reserve have a mandate to keep inflation low and stable—typically targeting around 2% per year. When inflation runs significantly above target, central banks raise interest rates, which tends to dampen economic activity and reduce asset prices in the short term.
Disclaimer
This article is for educational purposes only and does not constitute financial advice.