What is Inflation?

Inflation is the rate at which the general price level rises — meaning your money buys less over time. For investors, inflation is the silent thief: even a 'safe' savings account at 1% interest is losing real purchasing power when inflation runs at 4%. Every investment decision should account for whether you're beating inflation, not just making nominal gains.

Inflation is typically caused by too much money chasing too few goods (demand-pull), rising production costs passed on to consumers (cost-push), or central banks printing too much money. The 2021–2023 inflation spike had all three: pandemic supply chain disruptions, pent-up consumer demand, and massive fiscal stimulus. A trifecta of price increases.

Moderate inflation (~2%) is healthy — companies can raise prices and grow earnings. High inflation is toxic: it erodes consumer purchasing power, forces central banks to raise interest rates, increases corporate borrowing costs, and compresses valuations of growth stocks (whose future earnings are worth less in today's dollars). The 2022 bear market was inflation's artwork.

Traditional inflation hedges include: real assets (real estate, commodities), TIPS (inflation-protected bonds), stocks of companies with pricing power, and historically gold. Bitcoin was marketed as 'digital gold' and an inflation hedge — then fell 65% during the 2022 inflation spike. Larry notes that not all theories age well.

Hyperinflation is extreme, runaway inflation — typically defined as prices rising more than 50% per month. Famous examples: Zimbabwe (2007–2009, prices doubling every 24 hours), Weimar Germany (1921–1923), Venezuela (ongoing). Hyperinflation destroys savings, destabilizes governments, and creates wheelbarrows full of worthless currency. Not great.