It covers a large number of items, including food, housing, apparel, transportation, medical care, and entertainment. For example, a basket of goods could include things like milk, gas, meat, rent, clothes, and other things essential for everyday life. Adding up the prices of these items one year and adding up the prices a year later can tell you whether prices are moving up or down. The percentage increase in price for these goods will be the inflation number. Of course, prices can also go down, too, in which case you've got deflation.
Inflation is given in percentage terms.
To understand how inflation affects the stock market, you first have to understand what determines stock prices of the companies traded on the various exchanges we discussed earlier. The stock price of a company depends on how much that company is expected to make in the future. In other words, the more you expect a company to earn in the future, the higher the value of the company's stock. If inflation is high, a company's earnings in the future are worth less and less. That's because what the company earns in the future can't buy the same things it can buy today.