Economics & Markets
Section 1
Core Idea
Inflation is a sustained rise in the general level of prices — the value of money in terms of goods falls. It's usually measured by a price index (e.g. CPI, PCE) over a period. Causes include demand pull (too much spending vs capacity), cost push (e.g. energy, wages), or monetary expansion. For founders, inflation affects real wages, input costs, and the real value of debt and cash; it also shifts discount rates and valuation. High inflation erodes nominal contracts and makes long-term planning harder; low and stable inflation is the usual baseline. Separate nominal (stated) from real (inflation-adjusted) when judging returns and costs.
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Section 2
How to See It
Pricing
You're seeing Inflation when you raise prices not because value changed but because costs or the general price level rose. Pass-through and margin depend on elasticity and competition; inflation is the backdrop.
Finance
You're seeing it when discount rates and cost of capital include an inflation premium. Real rates = nominal minus expected inflation. Valuations and project NPVs should use consistent real vs nominal assumptions.
Hiring
You're seeing it when wage expectations track inflation. In high-inflation periods, nominal wage growth rises; real wages may or may not. Budget and comp planning need an inflation assumption.
Section 3
How to Use It
Assume an inflation path for planning (e.g. 2% or current consensus). Do valuation and capital allocation in real terms when possible, or be explicit about nominal. Lock in nominal cost (e.g. fixed-rate debt) when you expect inflation to rise; avoid long nominal receivables when inflation is high. Index key contracts if the horizon is long.
Decision filter
"Are we thinking in nominal or real terms? For multi-year decisions, real (inflation-adjusted) numbers are the right basis. For contracts and comp, decide whether to index."
As a founder
Build an inflation assumption into budgets and board decks. When raising or deploying capital, clarify whether your hurdle is nominal or real. In high-inflation environments, favour shorter nominal commitments and pass-through where possible.
Section 5
Founders & Leaders
Indra NooyiFormer CEO, PepsiCo; Chair, Amazon
Nooyi managed input costs and pricing across cycles, including inflationary periods — passing through where possible, hedging and reformulation where not. Founders can copy the discipline: model inflation in the P&L and balance sheet, and separate "we're raising price because of inflation" from "we're raising price because of value."
Section 7
Connected Models
Reinforces
GDP
Real GDP is nominal GDP adjusted for inflation. Growth and business planning should use real figures for volume and productivity; inflation is the wedge between nominal and real.
Reinforces
Time Value of Money
The time value of money includes an inflation component: nominal rates = real rate + expected inflation (approx.). Discounting and NPV depend on whether you use nominal or real cash flows and rates.
Leads-to
Cost of Capital
Cost of capital is usually quoted in nominal terms; it embeds expected inflation. For real project evaluation, use real cost of capital and real cash flows so inflation doesn't double-count.
Section 8
One Key Quote
— Milton Friedman, on inflation"Inflation is always and everywhere a monetary phenomenon. But in the short run, supply and demand for goods and labour drive the pace of price change."
Section 11
Summary & Further Reading
Inflation: sustained rise in the price level. Use real (inflation-adjusted) figures for strategy and valuation; assume an inflation path for comp and contracts. In high-inflation regimes, shorten nominal commitments and pass through where possible.
01
Book
Inflation, money, and real vs nominal in standard macro.
02
03
Online
Inflation targets, forecasts, and policy; inputs for your own assumptions.