Whenever the news hits that another round of inflation is looming, consumers collectively groan and brace for the worst. They realize that they will be paying more for just about everything, even if the amount is so nominal that they barely notice.
While they attempt to stretch the dollar further, they usually do not pull back much on discretionary spending. The end benefits for financial institutions, major companies, and the finance market at large, by contrast, can make huge strides.
What inflation does in a down market
In an economy where unemployment rates are up, housing prices soar, and fewer loans are approved, inflation can seem like the cherry on top of a financial disaster. As experienced in previous economic recessions, bail-outs are frequently needed to stop the country from hemorrhaging cash.
Understanding inflation can be a difficult task if you don’t follow the market or have a background in finance, but this tool can be helpful. Calculating different interest rates, comparing the value of the U.S. dollar against other currencies, and being aware of current global events is critical to know how inflation works.
How inflation impacts the stock market
Inflation is something that is tied to the stock market directly. For investors, just hearing the word inflation causes them to react in a panic. However, inflation can be great for the stock market if you analyze the historical data. Inflation doesn’t normally cause companies to go out of business in droves, or even to massively devalue their stocks.
There will be ups and downs as the market slumps, then rebounds, sometimes surging above and beyond market predictions. Don’t have more money tied up in stocks than you are comfortable losing and inflation will not have a negative impact on your bottom line. Moreover, you can still buy and sell, albeit cautiously, during periods of inflation.
How inflation impacts the consumer
During periods of low inflation, everything gets cheaper. Gas prices are lower, more people save money, and future predictions are generally optimistic. However, this is also the time that everyone is waiting with bated breath until the other shoe drops.
In other words, when everything is going well – perhaps too well in the opinions of some a climate of financial unrest develops. People worry needlessly about what is going to happen, but the only real action that they take is to hoard cash. Inflation prompts action in the form of more robust spending, increased contributions to retirement funds, and other measurable financial moves.
While few want to live in a world where the price of food, housing, and other essentials constantly goes up, inflation, at least to a degree, gets people to start thinking about their future and making moves.
Without inflation, there would be less economic growth. Companies would not have the profits that they need to expand, hire more workers, and pay more in taxes. Likewise, banks would permanently pull back on consumer loan products, such as mortgages and loans. The current financial system requires periods of inflation for continued growth and expansion.
