What Does Increasing Inflation Mean for Stocks?

What Does Increasing Inflation
Mean for Stocks?
By www.ProfitableInvestingTips.com

http://profitableinvestingtips.com/stock-investing-tips/what-does-increasing-inflation-mean-for-stocks
Prices of goods and services are
inching up and according to The Wall
Street Journal the Fed is not going to
get in the way of a little inflation.

Inflation has begun picking up, and it
looks as if the Federal Reserve is
going to let it keep climbing.

Before We Continue…
Click the links below to get your
FREE training materials.
Free Weekly Investing Webinars
Don’t miss these free training events!
http://www.profitableinvestingtips.com/free-webinar
Forex Conspiracy Report
Read every word of this report!
http://www.forexconspiracyreport.com
Get 12 Free Japanese Candlestick Videos
Includes training for all 12 major candlestick signals.
http://www.candlestickforums.com

The Labor Department on Tuesday
said that consumer prices rose by
0.3% in September from August,
putting them 1.5% above their year-
earlier level.

With gasoline prices stabilizing,
annual inflation ought to push above
2% on the year within a couple of
months.

Core prices, which exclude food and
energy costs, have been there for a
while.

Last month they were up 2.2% on
the year.

The worry on the mind of Wall Street
for the last couple of years has been
that in order to stay ahead of inflation
the U.S. Federal Reserve will start
raising interest rates and high
interest rates would hurt stocks.

It appears that the Fed might not be
as worried about inflation as we all
thought.

Assuming that the Fed does not
raise rates very fast and inflation
goes up, what does increasing
inflation mean for stocks?

How Inflation Affects
Stocks

The effect of inflation on stocks is
that profits and prices eventually
decline.

Investopedia discusses
inflation’s impact on stock returns.

Rising inflation has an insidious
effect: input prices are higher,
consumers can purchase fewer
goods, revenues and profits decline,
and the economy slows for a time
until a steady state is reached.

This negative impact of rising
inflation keeps the Fed diligent and
focused on detecting early warning
signs to anticipate any unexpected
rise in inflation.

But once the unanticipated inflation
works its way through the levels of
economy, the impact of a higher
steady state of inflation can have
varying effects.

In other words, the unexpected rise
of inflation is generally considered
the most painful, as it takes
companies several quarters to be
able to pass along higher input costs
to consumers.

Likewise, consumers feel the
unexpected “pinch” when goods and
services cost more.

However, businesses and
consumers eventually become
“acclimated” to the new pricing
environment

and then even when a new higher
steady state is reached, the
expected inflation that may occur
thereafter can result in consumers
spending more cash.

These consumers become less likely
to hold cash because its value over
time decreases with inflation.

For investors, this can cause
confusion, since inflation appears to
impact the economy and stock
prices, but not at the same rate.

Those who gained adulthood in the
1970’s remember going Target to
buy garden supplies in the fall
because the same supplies were
going to be much more expensive in
the spring.

Inflation is disruptive on several
levels.

The end result at the end of the
1970’s was called stagflation in
which the economy stagnated along
with stock prices while the cost of
living kept going up.

When inflation is a dominant factor
companies quit hiring to save on
salaries which retards growth.

This was the stagflation effect that
the Fed is usually concerned about.

The problem today is that the Fed is
so worried about choking off the
recovery that they are probably
going to wait a bit longer.

This generally heartened the market
as the immediate effect of higher
rates is a drop in stock prices.

What Does Increasing Inflation Mean for Stocks?

Recommended

Recommended

More Related Content

More from InvestingTips

More from InvestingTips (20)

Recently uploaded

Recently uploaded (20)

What Does Increasing Inflation Mean for Stocks?