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U.S. inflation accelerated to the fastest pace in four decades last month, according to the Bureau of Labor Statistics, as surging energy, rent and used car costs add pressure to consumer prices. This cements high inflation as a hallmark of the pandemic recovery and eroding spending power even as wages increase.

We are hearing a lot about inflation these days; prices are going up on goods and services, from gas to cars to housing and lumber, etc. But what exactly is inflation, how has it impacted the economy over the years and could its impact hit closer to home?

Inflation refers to a general progressive increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.

Real Money contributor Ed Ponsi says we're sandwiched between inflation and other economic concerns, and the pandemic's turn for the worse. But he’s got a sweet stock to buy and hold for the new year, with charts and a delicious reason why. Read more about it and get more investing ideas on Real Money.

Against a backdrop of solid demand, businesses have been steadily raising prices for consumer goods and services at the same time supply chain bottlenecks drive up costs.

“Inflation hurts Americans' pocketbooks, and reversing this trend is a top priority for me,” President Joe Biden said recently, noting that a key driver of the increase was energy prices. He pledged that his administration would work to reduce those costs.

This isn’t the first time and it won’t be the last that inflation affects the economy and the consumer feels it in their wallet.

How Can You Protect Your Portfolio?

How do you protect your investments during a time of growing inflation?

TheStreet Recommends

High-interest rates and companies raising prices don't add up to an investment profile most investors enjoy. Stocks may provide some protection against inflation. Stocks are still a good hedge against inflation because, in theory, a company’s revenue and earnings should grow at the same rate as inflation.

It’s important during this time to take a long view strategy when it comes to stock investments. Instead of making a snap decision when it comes to your investments, now is the time to stay the course and see inflation as an opportunity.

"Stock market investors typically react negatively to unexpected increases in inflation, but their reaction may be shortsighted,'' said Mark Hulbert, a markets commentator for TheStreet and founder of the Hulbert Financial Digest.

“Over the long term, nominal corporate earnings grow faster when inflation is higher. This is why the stock market, for long-term buy-and-hold investors, is an excellent inflation hedge. If the stock market in coming months falls significantly in reaction to higher-than-expected inflation, shrewd long-term investors might want to consider it a buying opportunity," he said.

Inflation Is a Normal Part of the Economic Cycle

Stocks have a reasonable chance of keeping pace with inflation. So it’s important not to panic. Inflation is part of the economic cycle and the U.S. economy is making a recovery from the pandemic and it is doing much better than it did during the long-ago period of stagnation and rising prices known as stagflation.

Despite fears of inflation and other market-stallers, the S&P 500 is going strong as the year draws to a close and many are betting that it will continue that growth well into 2022. Jim Paulsen, chief investment strategist at the Leuthold Group, recently said he expects the index following the country's 500 biggest companies to top 5,000 points in the coming year. Currently near 4,800, the index is up more than 27% so far this year and reached an all-time high on Monday despite small day-to-day ebbs. 

More in our inflation series: