12th May, 2022
We are already feeling the effects of the rising inflation rates, which are set to continue to increase over the coming months.
The price increases are being felt in practically everything we buy such as food products, transport, commodities, and other essential goods, not to mention the impact on the growing fuel crisis.
Here we will discuss the current inflation situation and how it affects the trading and investment world.
The rate of inflation is measured by several indices, including the Consumer Price Index (CPI). The CPI compares the difference in what you would pay for a standard basket of commonly purchased goods.
In the United States, the inflation rate has risen to 8.5%, the highest in forty years. While in Europe, this figure has increased to 7.9%, up from 5.9% the previous month.
Nigeria currently has one of the highest inflation rates, and it is rising fast, by 1.63% in just one month from February to March in 2022.
The negative impact of inflation on our day-to-day life is already being felt worldwide. However, there are some potentially positive knock-on effects, such as lower unemployment and wage increases.
How Inflation Affects Trading
Keeping track of inflation and deflation rates is an essential consideration when investors make trading decisions.
Because inflation affects the exchange rates between currencies of different countries, it is an important factor for successful forex trading strategies.
With Contract for Difference (CFD), you trade the share prices and take advantage of rising and falling share prices which are directly affected by inflation and deflation.
The relationship between inflation and the stock market is complicated and requires deep analysis.
In the short term, inflation could negatively impact share prices due to the all-around economic downshift both on the stock market and consumer spending in general.
Closing following news and tracking changes in inflation is vital. Still, it is crucial to also keep in mind other factors such as economic growth, debt, and social or political issues, as these also impact trading decisions.
Because the central banks control currencies, it’s important to check these official websites for an accurate and clear view of the market.
Pros and Cons of Inflation
There are obviously considerable negative impacts of inflation and high-interest rates, but there can also be some advantages.
The first step banks will take when faced with inflation is to increase loan and credit interest rates. On the upside, this means that savings accounts become more profitable with higher deposit rates.
In trading terms, it means increased exposure to risk and overweight portfolios. On the other hand, it allows traders to diversify holdings and offers greater buying power.
As the price of commodities will most likely go up as a result of inflation, holding a diversified commodity portfolio could potentially mitigate risk. A diversified portfolio is a proven inflation-fighting strategy.
It’s important not to overreact in this period of transition. Remember that prices will stabilize at some point in the future.
Keep a close track of inflation rates and news of how the stock market continues to be impacted.