Inflation is a general increase in the prices in an economy over time. This results in lower purchasing power for the relevant currency. Inflation is an expected occurrence in modern economies. Inflation is primarily due to a constant increase in the monetary base by the local government or central bank.
Inflation is generally measured based on the prices of goods and services. These products’ prices are tracked by a weighted average market basket of many items, known as the consumer price index (CPI).
Inflation as measured by the CPI is likely to correspond with inflation in the price of assets. However, these two types of inflation will not always be perfectly correlated. As a result of the COVID-19 pandemic, asset price inflation significantly outpaced consumer good inflation. This was due to a decrease in demand for goods and services which put deflationary pressure on consumer goods.
Moderate levels of inflation are generally viewed as healthy for an economy. The pending increase in prices incentivizes people to spend money earlier, stimulating commerce. However, inflation means that the value of a currency will consistently decrease over time, making it a poor store of value.
When inflation levels are extremely high it is known as hyperinflation. Hyperinflation results in rapid decreases in a currency’s value. This is destabilizing for an economy and generally leads to economic collapse if the inflation rate cannot be controlled.