Inflation: Definition & Meaning | Bondfish
Inflation is the rate at which the general price level for goods and services in an economy rises over time, which reduces how much a fixed sum of money can buy.
What it means
Inflation is typically reported as an annual percentage change measured by a price index, most commonly the Consumer Price Index (CPI), though the Fed's preferred gauge is the Personal Consumption Expenditures (PCE) price index and producers track it via the Producer Price Index (PPI). U.S. headline CPI inflation ran at 3.4% year-over-year in August 2026, with core inflation (excluding food and energy) at 2.4%, according to government data compiled by Trading Economics.
Moderate, stable inflation is normal in a growing economy; central banks such as the Federal Reserve and the European Central Bank generally target around 2% over the medium term. Inflation that runs persistently above target erodes purchasing power faster and often triggers higher policy interest rates.
Why it matters for bond investors
Bonds pay fixed or predictable cash flows, so inflation is one of the biggest risks to a bondholder's real return — the return after subtracting inflation. If a bond yields 4% and inflation runs at 3.4%, the real return is closer to 0.6%. Rising or higher-than-expected inflation also tends to push market interest rates up, which lowers the price of existing fixed-rate bonds. This is why bond investors watch inflation data closely and why some allocate to inflation-linked instruments (such as U.S. TIPS or European inflation-linked government bonds) to hedge that risk.
Related terms
This definition is for general information only and is not investment advice. Bond investing involves risk, including possible loss of principal.