Inflation
A general rise in prices — the value of money falls, affecting corporate costs, consumption, interest rates, and stock prices broadly.
Inflation rate = (this year's price index − last year's price index) ÷ last year's price index × 100
Mild inflation (around 2% a year) is seen as the normal state of an economy that's turning over.
In plain terms
Inflation is "prices rising in general." If a pack of instant noodles that cost $1 last year costs $1.10 this year, the same money buys less. In effect, the value of money has fallen.
The most widely watched gauge is the CPI (Consumer Price Index). It bundles the prices of various goods and services that go into a shopping basket and shows how much they have risen compared with a year earlier.
What it tells you
Inflation is a force that moves share prices from outside any individual company. When prices rise quickly, the central bank (the Fed in the U.S.) tends to raise interest rates to contain it, and when rates rise, the overall mood across stocks changes.
For a company, raw materials and labor cost more, so expenses rise. Companies that can pass those costs on through their product prices (strong pricing power) hold up, while those that can't see their margins squeezed.
Formula
Inflation rate = (this year's price index − last year's price index) ÷ last year's price index × 100 (Representative measure: Consumer Price Index, CPI)
What high or low means
Mild inflation (around 2% a year) is seen as the normal state of an economy that's turning over. If it's too high, spending and investment pull back; if it's negative (deflation), that can be a sign of recession.
In periods of rising prices, companies with strong pricing power (high gross margins) and little debt tend to be shaken relatively less.
Inflation is an "overall average," so the effect on an individual company varies widely. Even in the same period of rising prices, a manufacturer that uses a lot of raw materials and a software company with a light cost structure feel completely different impacts.
Headline CPI includes energy and food, which swing a lot, so to see the trend people also look at core CPI, which strips those out.
Inflation is a macro condition, so its direction is hard to call. This term is background knowledge for reading earnings and news. (※ Our screens cover the SEC-filed financials of individual companies and don't provide macro indicators such as CPI or interest rates themselves.)
In the 1970s the United States suffered high inflation running above 10% a year through two oil shocks. Only after the Fed belatedly pushed the policy rate up toward 20% did prices come under control, and the process came at the heavy cost of a deep recession.
In 2021–2022 as well, when post-COVID prices surged to their highest in some 40 years, the Fed raised rates quickly and stocks were shaken hard that year. History has repeated the lesson that once prices get loose, bringing them back carries great pain.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see SEC-filing-based financial metrics alongside the sector benchmark.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.