Inflation

What is Inflation? — Definition

Inflation is measured by tracking a basket of goods and services over time. In the U.S., the main measure is the Consumer Price Index (CPI). The Federal Reserve targets approximately 2% annual inflation as healthy for the economy. When inflation runs hot — as it did in 2022, peaking near 9% — the Fed raises interest rates to cool spending and borrowing.

For investors, inflation is a critical risk. Cash and low-yield bonds lose real purchasing power when inflation is high. Stocks, real estate, and commodities historically provide better long-term inflation protection, but high inflation can also hurt company profit margins if input costs rise faster than prices.

Example

$100,000 in cash earning 0% interest during a period of 7% inflation is worth only $93,000 in real terms after one year. After five years, it's worth approximately $71,000 in today's purchasing power — a 29% loss without any nominal decline.

The BMInsider Fear & Greed Index often reflects inflation fears — inflation surges tend to push sentiment toward Fear as investors worry about Fed rate hikes and their impact on equity valuations.