ShareTipsInfo >> Article Directory >> Role of Inflation in Stock Market


Lets start with what is INFLATION:

"The rate at which the general level of prices for goods and services is rising".

There are many varying measures of inflation in use because different prices affect different people. The most widely known indices are the Consumer Price Index (CPI) which measures the change in nominal consumer prices and the GDP deflator which measures inflation in new products and services created.                         


Understanding inflation is crucial to investing because inflation can reduce the value of investment returns. Inflation affects all aspects of the economy, from consumer spending, business investment, and employment rates, to government programs, tax policies, and interest rates.

It is because of the inflation that share market has collapsed, it is bound to affect the investors. In fact, the way the share market was going up was itself creating doubts in the minds of the people about its real growth. When the market crossed 10,000 points nobody was able to explain the logic of it. So also when it reached 12,000 points, it remained unexplainable. The happenings in the share market were certainly a cause of concern. The government ought to have looked into the factors when the market started rising all of a sudden.  However, stocks are still a good hedge against inflation because, in theory, a company’s revenue and earnings should grow at the same rate as inflation over the time.

More importantly, inflation robs investors (and everyone else) by raising prices with no corresponding increase in value.
                                            You pay more for less.

This means company’s financials are over-stated by inflation because the numbers (revenue and earnings) rise with the rate of inflation in addition to any added value generated by the company.

                                   "The more cash or cash equivalents you hold, the worse inflation will punish you. A $100 under the mattress will only buy $96 worth of goods after a year of 4 percent inflation".
Inflation erodes your purchasing power and retirees on fixed incomes suffer when their nest egg buys less each passing year. This is why financial advisers caution even retirees to keep some percentage of their assets in the stock market as a hedge against inflation.         



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