What Is Inflation? Definition, Causes, and Impact on Markets

Definition:

Inflation is the rate at which the general level of prices for goods and services rises, resulting in a decrease in purchasing power.

Explanation:

Inflation occurs when the value of a currency declines over time, meaning consumers can buy less with the same amount of money. It is a key economic indicator monitored by governments and central banks. Inflation is usually measured by indices such as the Consumer Price Index (CPI) or Producer Price Index (PPI).

There are several causes of inflation, including:

• Demand-pull inflation: When demand exceeds supply.
• Cost-push inflation: When production costs rise, causing prices to increase.
• Monetary inflation: When excessive money is printed and injected into the economy.

In the financial markets, inflation plays a major role in shaping monetary policy. Central banks like the Federal Reserve or ECB may raise interest rates to combat high inflation or lower rates to stimulate inflation when it’s too low.

Traders monitor inflation closely because it affects currency value, interest rates, bond yields, and stock prices.

Example:

If the U.S. inflation rate rises sharply, the Federal Reserve may hike interest rates, causing the USD to strengthen in the Forex market.

Related Terms:

Interest Rate, CPI, Monetary Policy, Central Bank, Currency Value, Economic Indicators

Category:

Macroeconomics / Fundamental Analysis

FastPip Tip:

High inflation often leads to higher interest rates. Always check inflation data on the economic calendar before entering trades—especially in major currency pairs.