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What Is Inflation and Why Does it Matter?

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What is inflation and why does it matter?

Inflation is the rate of increase in the price of goods and services. 

Simple enough, right? Well, let's explain why this matters for markets. 

Don't run. We're going to explain how this impacts you before we explain how this impacts markets. 

You go to the department store for more clothes, but the prices are all marked up now. Prices went from $100 to $102. That's inflation of 2% on clothes. 

 You're saying, 'what's going on? Where's my discount?' 

Inflation rose a bit. Now consumer are spending less. Then, inflation moves lower again -- maybe less than 2%.

The Federal Reserve needs to do something to stimulate a slowing economy. The Fed lowers its benchmark rate, the rate at which it lends to huge financial institutions, like the one you use for your money. 

Now that rate is lower and banks, who lend at slightly higher rates than those they borrow at they have to make a profit, will lend to you at lower rates. Now you'll spend more.

This works for business spend as well. 

Now, you'll need to check out the video above to get the beginners picture for why markets care about inflation. 

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