Inflation can best be understood in simple terms as a sustained and continuous increase in the prices of goods and services. It is measured in a number of different ways and one of the best-known is the Consumer Price Index (CPI), which is released on a monthly basis by the U.S. Bureau of Labor Statistics. A rise in inflation is accompanied by a decrease in purchasing power and has an impact on corporate asset values and in financial investing such as stock market investing. The composition of an investment portfolio is also affected because of the need to balance the stock market investing with investing in fixed-income instruments.

To serious investors who engage in stock market investing as well as other forms of investment, it is important to understand the relationship between inflation and corporate financial statements as well as the impact of inflation on financial market environments and the return that can be expected from investments. For instance, fixed assets that are carried at historical cost on company balance sheets may actually be worth a lot more at current prices because of inflation. The company will therefore be much sounder financially than it’s audited financial statements would indicate.

Every month, the U.S. Department of Commerce’s Bureau of Labor Statistics releases information on two key inflation indicators: the Consumer Price Index (CPI) and the Producer Price Index (PPI). These indicators of the retail inflation and the wholesale inflation are closely watched by financial analysts as well as people who are engaged in stock market investing. These numbers have the power to move financial markets in either direction depending on whether inflation is low or high. When it comes to stock market investing, low inflation tends to boost prices while high inflation tends to depress them. It is also important to remember that it is the trend that is important and undue attention should not be given to any particular set of numbers.

It is a common assumption that stock market investing is a better hedge against inflation because companies can raise the prices of their goods and services to combat inflation. For fixed-income investors, inflation tends to depress returns and depreciate the value of the principal. However, investors should not take this for granted and put all their capital into stock market investing. They should strike a prudent balance between equities and bonds in constructing their portfolio.