The most common measure of inflation is the Consumer Price Index (CPI), which is computed each month by the U.S. Bureau of Labor Statistics. The index tracks the percentage change in prices of a basket of 80,000 goods and services and is measured against the reference period 1982-1984.
When the economy is healthy and consumers are able to enjoy a rising standard of living, their demand for products grows, which raises the cost of goods and services.
Inflationary times signal a growing economy and shrinking unemployment. However, when inflation gets to be too high, it can cause a recession or, in extreme cases, a depression.
Investing can help you counteract the negative effects of inflation if your rate of return is greater than the inflation rate. Yet, though you may be able to help offset the effects of inflation, your return will still be in some way affected by it.
The time value of money is an economic concept based on the principles of both investing and inflation. In practical terms, it means that a dollar given to you today is worth more than a dollar you receive one year from now.