Inflation
The rate at which the general price level of goods and services rises, eroding purchasing power over time.
Inflation measures how fast prices across an economy are rising. Central banks target a steady, low rate — typically around 2% — because runaway inflation destroys purchasing power while deflation can freeze spending.
Markets watch inflation closely because it drives central bank decisions. Rising inflation forces rate hikes that raise borrowing costs, compress equity valuations, and hit long-duration bonds hardest. Falling inflation opens the door to rate cuts that fuel risk assets.
Example
When U.S. CPI surged above 8% in 2022, the Fed launched its most aggressive hiking cycle in four decades. The S&P 500 fell over 25% and the Nasdaq nearly 35% as rising discount rates crushed growth stock valuations.
Related Terms
Budget Deficit
When government spending exceeds tax revenue in a given year, the gap must be financed by issuing new debt — adding to the national debt.
BeginnerConsumer Price Index (CPI)
Tracks changes in the price of a fixed basket of consumer goods and services — the most closely watched inflation gauge.
BeginnerCore PCE
The Fed's preferred inflation gauge: the PCE price index excluding food and energy — the gauge the Fed watches to track its 2% inflation goal.
IntermediateDeflation
A sustained fall in the general price level — the opposite of inflation — that can signal a collapsing demand environment.
IntermediateDisinflation
A slowdown in the rate of inflation — prices still rise, just more slowly — distinct from deflation, where prices actually fall.
IntermediateFederal Reserve
The U.S. central bank — its rate decisions and forward guidance move global markets more than any other single institution.
BeginnerFiscal Policy
Government spending and taxation decisions that expand or contract the economy, independent of the central bank's monetary levers.
BeginnerGross Domestic Product (GDP)
The total monetary value of all goods and services produced within a country in a given period — the headline measure of economic size and growth.
BeginnerInterest Rate
The cost of borrowing money, set or influenced by central banks — the single most powerful lever in macroeconomics.
BeginnerMoney Supply
The total stock of money in circulation — tracked via M1, M2, and M3 aggregates — a key input to inflation and liquidity analysis.
IntermediateProducer Price Index (PPI)
Measures price changes at the wholesale/producer level — a leading indicator of consumer inflation since input costs roll into retail prices.
IntermediateQuantitative Tightening (QT)
A central bank's deliberate shrinkage of its balance sheet by allowing bonds to mature without reinvestment, draining liquidity from the system.
AdvancedReal Interest Rate
The nominal interest rate minus expected inflation — the true, inflation-adjusted return on lending or cost of borrowing.
IntermediateRetail Sales
Monthly measure of consumer spending at the register — a direct read on whether households are putting their money to work.
BeginnerSoft Landing
The ideal macro outcome: the central bank tames inflation through rate hikes without triggering a recession — rare but market-moving when achieved.
IntermediateStagflation
The toxic combination of high inflation and stagnating economic growth — the worst macro environment for central banks and equity markets.
IntermediateTrade Balance
The difference between a country's exports and imports — a surplus means more exports; a deficit means more imports, affecting GDP and currency.
Intermediate