By Gabriele Denaro · 1 October 2026
Inflation is the general, sustained rise in the level of prices of goods and services. It is measured, for example, by the consumer price index (CPI), which tracks the cost of a basket of goods and services bought by consumers. The opposite is deflation, a general and sustained fall in prices, often tied to recessions. Stagflation combines high inflation with economic stagnation and high unemployment; hyperinflation is extremely high, runaway inflation that destroys the value of money.
Inflation can come from demand outpacing supply (demand-pull), from rising production costs (cost-push: a sharp rise in energy prices is one example) or from expansionary monetary policy. It is a teaching classification; in reality causes often add up.
Purchasing power is the amount of goods and services a sum of money can buy. If prices rise faster than incomes, the same money buys less. With 2% inflation and a 0% account, after a year purchasing power falls by about 2%. The real return is roughly the nominal return minus inflation: with 3% nominal and 2% inflation it is about 1%, before taxes and costs.
The rule of 72 is an approximation: dividing 72 by a constant rate gives roughly the number of years to halve (or double) a value. With constant 3% inflation, purchasing power halves in about 24 years (72 ÷ 3). It is a rough rule, not a forecast.
Central banks fight inflation by raising interest rates: credit becomes more expensive and demand tends to cool. The European Central Bank targets inflation of 2% over the medium term, symmetric: deviations above or below are considered equally undesirable.
"Core" inflation is a measure that excludes or reduces the weight of very volatile components, often energy and food, depending on the methodology used; it helps read the underlying trend. Inflation-linked government bonds have coupons and/or principal adjusted by an inflation index defined in the bond's terms: rules vary from bond to bond.
Inflation erodes the purchasing power of idle savings and, if wages rise more slowly than prices, of incomes too. Someone with fixed-rate debt tends to see its real weight shrink, since the instalment stays the same in euros but is worth less (if incomes also rise). Some assets, like property or commodities, are called "inflation hedges" because they tend to hold value when prices rise, with no guarantee.
General educational information, not personal financial, tax or legal advice. It may be incomplete or out of date. Terms of use.