Inflation

Inflation is the cost of goods and services increasing, usually measured by CPI (US) or HICP (EU). Deflation is the opposite, costs decreasing. Generally inflation or deflation comes from a shock in demand or supply.

Most central banks have a policy to try to keep inflation at a certain rate, usually 2%. They use adjustments in cash interest rates and other tools to do this.

Certain asset classes are nominal (fixed income) and interest rate sensitive (fixed income, equity). Others are “real”/inflation adjusted (commodities, equity, real estate, infrastructure).

There are also inflation-protected bonds (TIPS / HICP linked bonds). These are still sensitive to the interest rate though.