Inflation & Deflation

Inflation erodes purchasing power — $100 today buys less next year. The CPI tracks a basket of goods. Moderate inflation (2%) is healthy; hyperinflation destroys economies. Deflation sounds good but causes debt spirals.

Quick quiz and answers

The Consumer Price Index (CPI) measures:

Answer: The price change of a basket of consumer goods and services. CPI tracks price changes for everyday goods — food, housing, energy — to measure consumer inflation.

Which asset class has historically performed best during high inflation?

Answer: Real assets: commodities, real estate, TIPS. Real assets like commodities and real estate tend to rise with inflation — their value is tied to physical goods.

Why is deflation dangerous for an economy?

Answer: Consumers delay purchases expecting lower prices, causing a demand spiral downward. Deflation creates a vicious cycle — falling prices lead to deferred spending, reducing demand and causing further price falls.

Core inflation excludes what two volatile categories?

Answer: Food and energy. Core CPI strips out food and energy to show the underlying, less volatile inflation trend.

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