Inflation

Inflation is the rate at which prices for goods and services rise across the economy, eroding the purchasing power of a fixed amount of money over time. The Federal Reserve targets roughly 2% annual inflation as consistent with healthy growth; sustained readings well above that erode savings and pressure the Fed toward higher interest rates.

Inflation affects stocks unevenly. Companies with pricing power can pass rising costs on to customers and protect margins; companies without it get squeezed from both sides, paying more for inputs while struggling to raise prices. Fixed-rate bonds are hurt directly, since their fixed coupon buys less in real terms as prices rise.