What is inflation, and how does it impact investments?

Inflation is the rate at which the general level of prices for goods and services rises, leading to a decrease in purchasing power. It occurs when demand for goods exceeds supply or when production costs increase. Inflation impacts investments by eroding the real value of returns. For example, if an investment earns 5% annually but inflation is 3%, the real return is only 2%. Inflation also affects interest rates, as central banks may raise rates to combat inflation, which can reduce the attractiveness of borrowing and impact stock and bond market performance. Investors must adjust strategies to protect their assets.