The economy and the market
Inflation and the Consumer Price Index (CPI)
Definition
Inflation is the general rise in prices over time, so each dollar buys less. The most watched US measure is the Consumer Price Index (CPI), published monthly by the Bureau of Labor Statistics, which tracks the average change in prices urban consumers pay for a basket of goods and services. The Federal Reserve's 2% inflation goal is measured with a different index, the PCE price index.
Example
Say the CPI stands at 250.0 one year and 260.0 a year later: prices rose 10 ÷ 250 = 4%. Cash of $1,000 then buys only what about $962 bought a year earlier, and savings earning 3% leave you roughly 1% behind in real terms. That is why investors compare returns with inflation, not just with zero.
Hypothetical numbers, for illustration only.
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