A high and rising rate of inflation can have a wide range of effects. Consumers may see their bills go up, and if they hold onto cash or other assets that are easily eroded by price increases, they might lose purchasing power over time. Business leaders watch inflation closely, especially when it’s tied to the cost of raw materials or employee wages. Government agencies, like the Bureau of Labor Statistics (BLS), produce a variety of price indices that help policymakers, investors and consumers track changes in prices across various categories of goods and services.
Ultimately, inflation is an important economic metric that is used to gauge overall economic health. A low, steady rate of inflation is usually considered positive, indicating that the economy is healthy and growing, leading to higher employment and wage growth that can help keep prices down. However, a spike in inflation can lead to an “inflation spiral,” where prices rise faster than wages and the economy can’t keep up.
Investors also follow the inflation rate, as it can impact the value of their savings and investment returns. Historically, stocks and nominal fixed income investments like bonds have had a negative correlation with inflation, but real assets such as commodities and Treasury Inflation-Protected Securities have exhibited a positive sensitivity to inflation.