Good or Bad Inflation? A Stock Markets Perspective

Inflation is a valuable metric in analyzing the strength of any country’s economy.  That said, perspective is vital in understanding what is useful at a given moment.

Economic numbers move stock markets. A significant cause of stock market volatility is news about metrics like inflation, interest rates, and unemployment. These give an indicator of the trajectory a country is moving.

The development of stock markets is necessary for a modern economy. Abdolnasser Hemmati, the Central Bank of Iran governor, has stated that market stability is of utmost importance. Iran’s capital markets can still develop further and boost the general economy.

Inflation Can Be Good or Bad For Stock Markets

The effect of inflation on stock markets is a delicate balance. When inflation gets too high, it is not suitable for the economy. The obvious reduction of the value of money is one significant effect.

A continual rise in inflations means that those who save money have little chance of seeing a real return on their money.

In theory, higher inflation rates are good for the economy. It encourages people to spend more than they save at constant interest rates. However, it is only positive to a certain point.

Meanwhile, extremely low inflation is a problem. Let’s use two popular purchases as reference points: oil and vehicles. If oil prices decline dramatically, motor vehicle owners will still buy the commodity at just about the same rates.

However, if the prices of their cars start falling, there is no urgency for buying them immediately. They could buy next year and actually save money. A little inflation encourages people to buy assets sooner and spend more.

Therefore, inflation can be both good and bad for the economy. This balance is why central banks often have to tinker with interest rates to counter the effect of inflation changes. One can use the terms good inflation and bad inflation to describe prevailing phenomena. Central Banks favor an inflation rate of about two percent.

Stock Markets Can Benefit From Inflation and Some Volatility

Good inflation boosts earnings and spending provided employment remains high. Not all inflation leads to recessions like some like to believe. Central banks have the unique role of having the policy arsenal to manage inflation. The most significant is the management of interest rates.

Stock market investors pay keen attention to the inflation trends. In the USA, there has been concern about inflation recently.

Unexpectedly slow recovery numbers jolted stock markets. Investors feared that the Federal Reserve would act to rein in monetary stimulus. Some saw the continual easing policies as a mistake in light of price pressures. The fed stated that it expects inflation to surge in the short term before dissipating in the long run.

Trading on the stock market is all about volatility. Remember, volatility is the movement of stock prices and index points in any direction. Short-term traders make a living off volatility. Quick traders like day traders make profits from these momentary movements.  Therefore, they are always alert for market-moving information such as interest rate changes.

Long-term investors usually prefer more certainty. Depending on the asset, less volatility is preferable. Therefore, a trader should factor in volatility in their projections. For short-term traders, volatility is necessary to actualize their strategy. Traders who have a technical approach can turn volatility into an advantage.

The Big Picture: Understanding Macroeconomic Is Vital

In summary, the correlation between inflation and stock volatility is apparent. Investors need to understand macro-economic data and how it moves markets. Inflation is not bad in a healthy economy. However, it can get out of control and make an economy chaotic.

Economists will continue to argue about optimum inflation rates. Whatever the precise level, most agree that a certain amount of inflation is essential. Inflation can be a result of policy or extraneous factors that cause it to rise or fall.

For volatility, understanding macroeconomic trends is indispensable. Traders must connect the dots and find out the degree and direction of volatility in any given period.

The injection of trader capital into stock markets is vital to ensure that capital markets remain robust. These concepts are fascinating, and any beginner trader should take a keener interest.