Inflation

Inflation is the sustained increase in the general price level of goods and services in an economy over time. When inflation rises, each unit of currency buys fewer goods — meaning your money loses purchasing power. The U.S. Bureau of Labor Statistics measures inflation primarily through the Consumer Price Index (CPI), which tracks price changes across a basket of ~80,000 items representing typical consumer spending.

Moderate inflation (around 2% annually) is considered healthy and is the explicit target of the Federal Reserve. It encourages spending and investment (since holding cash loses value), supports wage growth, and makes debt easier to repay over time. However, high inflation (above 4%–5%) erodes savings, hurts fixed-income retirees, and creates economic uncertainty. Deflation (falling prices) is actually more dangerous, as it discourages spending and can trigger economic depression.

Historical U.S. Inflation:

Period	Average Annual Inflation	Notable Context
1926–2025	~3.0%	Long-term average
1970s–early 1980s	8%–14%	Oil crisis, stagflation
1990s–2010s	2%–3%	"Great Moderation"
2021–2022	7%–9%	Post-COVID supply/demand shock
2024–2025	2.5%–3.5%	Return toward target

Types of Inflation:

• Demand-Pull: Too much money chasing too few goods (stimulus-driven)
• Cost-Push: Rising production costs (energy, labor, materials) passed to consumers
• Built-In: Self-fulfilling cycle where expected inflation drives wage/price increases
• Shrinkflation: Same price but smaller quantity — hidden inflation
• Asset Inflation: Rising prices of stocks, real estate, and other assets

How Inflation Affects Investors:

Asset Class	Inflation Impact	Protection Level
Cash/Savings	Loses purchasing power	Poor
Bonds (Fixed)	Real returns decline	Poor
TIPS/I-Bonds	Adjusts with CPI	Excellent
Stocks	Companies raise prices	Good (long-term)
Real Estate	Rents/values rise	Good
Gold/Commodities	Traditional hedge	Moderate
Crypto (Bitcoin)	Debated inflation hedge	Uncertain

The Rule of 72 and Inflation:

Divide 72 by the inflation rate to estimate how many years until prices double:

• At 3% inflation: prices double every 24 years
• At 5% inflation: prices double every 14.4 years
• At 7% inflation: prices double every 10.3 years

This means a retiree at age 65 with 3% inflation will see their living costs roughly double by age 89 — making inflation the "silent killer" of retirement plans.