HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
XM information and reviews
XM
86%
NordFX information and reviews
NordFX
86%

A Guide to Understanding Inflation and How It Affects Traders


Inflation is becoming an increasingly important factor in our everyday lives. Google searches are up, and it has reasserted itself as a topic of popular conversation. Traders are having to familiarise themselves with how inflation affects financial markets. Discover what inflation is, why it matters and how it impacts policymaking. In very simple terms, inflation is the rate at which prices rise. It’s when things cost more than they used to.

Let’s say a trip to the grocery store last year cost you $100. One year later, that same “basket” cost has risen to $105. This would be reported as a 5% year-over-year price change, or 5% inflation.

In effect, inflation reduces our purchasing power over time. This is because it means that every dollar you have buys less tomorrow – be it bread, rent, or medical services. The fact that goods cost more than they once did, isn’t inherently good or bad. But it does have a very real impact on your money, businesses, and economies.

What causes inflation?

Rising inflation is essentially down to the age-old battle between supply and demand. You might read about more technical terms like “cost-push” and “demand-pull” inflation. Companies may see that the cost of raw material is rising, so they have to raise their prices to compensate. Higher costs are pushing the price of the things we buy higher. Take your smartphone and think about the many different parts used to produce it. If we assume the cost of the battery or the microchip inside increases in price,.

Eventually, those higher prices will be passed on to the consumer. When our demand to purchase things is greater than what companies can supply, we may pull the price higher. People might have a lot of surplus cash or are accessing credit and want to spend. Businesses may need to raise prices because they lack adequate supply. That gives rise to inflation.

Is inflation good or bad?

The good: Low and steadily rising prices are typically brought about by a healthy economy. Stable inflation ensures a modern economy can continue to benefit from an efficient allocation of resources.

In fact, debts may be paid off with money that is worth less than it was before. Imagine a vendor who sells a product for $10 and owes the bank $200 today. But next year, the seller can charge $15, while the debt remains the same. This means it becomes easier to pay back.

The bad: Inflation reduces how much each dollar is worth. Higher inflation therefore means consumers get less for their money.

How is inflation measured?

The most popular measure of inflation is produced by the US Bureau of Labour Statistics (BLS) which tracks and calculates a representative group of things consumers spend their money on, known as a ‘basket’. The widely followed Consumer Price Index (CPI) is the monthly expenses for an average US household and includes housing, transportation and food prices.

“Core” CPI strips out food and energy costs which are traditionally more volatile.

Inflation is a backward-looking figure and doesn’t forecast the future and how long inflation might last. The highest rate of inflation in the US since the introduction of CPI was 19.66% in 1917. A record low printed in 1921 of -15.8%. The 1970s saw the longest period of sustained high inflation rates.

How does inflation affect policies and interest rates?

Keeping inflation levels stable and consistent (“price stability”) is the responsibility of central banks. They will generally have an inflation target around 2% and can bring about change by adjusting its monetary policies and interest rates.

Investors also need to understand that certain asset classes will perform better as they can act as a hedge against high inflation. Common assets that are more likely to be protected against inflation include gold, commodities and real estate investments. Gold can behave like an ‘alternative currency’ in times of high inflation, especially when it is a component of a diverse portfolio.

Commodities are key inputs into CPI and may act as a forward-looking measure of inflation. When the price of a commodity rises, so will the cost of the products that the commodity is used to produce.

#source


RELATED

Understanding the Difference Between Trading and Investing

In this article, we are going to talk about the differences between trading and investing. They are wide-ranging however, they are both good ways of potentially making...

What Is a Market Maker?

Anyone who's generally familiar with trading has heard about buyers, sellers and brokers. But there's one type of market participant that often gets...

How to stop qwertying your way to hackers: 5 internet security tips from OctaFX

Who will you blame if you wake up one day without a job and with no money on your bank card? Yourself. That is if you don't follow internet security tips. The global broker OctaFX outlines the main do's and dont's of staying safe online.

Finding Forex Trading Signals Services that are very profitable

How you can find a great currency Trading alert or signal service is not that hard if you follow the systematic method recommended in this article...

Understanding the Piercing Candlestick Pattern in Trading: Benefits and Limitations

The vast world of trading is replete with countless patterns and technical indicators, each promising its own set of advantages. Among these, the piercing candlestick pattern stands...

Q2 2022 Earnings Season Explained

Earnings season is a few weeks when most public companies share their quarterly performance in their earnings reports. It takes place every three months...

A Comprehensive Guide On How To Trade USD/CAD Currency Pair

The USD/CAD currency pair represents the relationship between the US dollar and the Canadian dollar and is a favored choice among currency traders due to its active trading hours...

Forex Trading Sessions: Types And Features

The schedule of forex trading sessions allows the trader to determine the best time to start working. During different sessions, the volatility of assets changes: increases or decreases...

Guide to Forex Trading Costs: Unraveling the Fees

Forex trading, much like any financial venture, comes with its own set of costs. Grasping these costs is crucial for every trader, as it not only influences their bottom line but can also provide..

Everything You Need to Know About Margin Trading

Margin trading is a popular method used by traders all over the world. It can offer attractive opportunities, but as with any form of trading there are no guarantees and the level of risk must be taken...

Scalping: 3 Forex Trading Styles to Try

Just as a soldier doesn't willingly run into battle unarmed, a successful trader shouldn't enter the market without a strategy. Trading is not a game of chance - if you open...

Can A Stock Go Negative?

There are numerous professional stock traders who have made a name for themselves in the dynamic stock market. However, it is essential to keep in mind that the stock market is also prone...

How to use MT4 WebTrader: A Useful Guide

In 2005, the MetaQuotes Software released the MetaTrader 4 trading platform which is an electronic trading platform that includes all the required features...

Trader: Profession of the 21st Century

Trading is the process of buying and selling various financial instruments. Therefore, a trader is an individual seeking to profit directly from the trading process...

Unpacking Demo Trading Accounts: Your Comprehensive Guide

Venturing into the world of trading can feel like navigating a maze, especially when you're diving into complex domains like forex, precious metals, or cryptocurrencies...

Online Forex Trading: A Beginner's Guide

The foreign exchange market, also called forex and even FX for short, is the world's most liquid and highly traded market in the world. The market solely trades...

All you need to know about Bitcoin

Bitcoin (BTC) is a digital currency. It doesn't exist in a physical form. Instead, there is a special cryptocurrency public ledger, which has records of all the Bitcoin transactions...

10 Reason to Trade Forex

Foreign exchange, or more colloquially known as forex or FX, is the buying and selling of currencies to make profits based on the changed currencies' values...

Is MetaTrader 4 good for beginners?

MetaTrader 4 (MT4) is one of the world’s most popular trading platforms, suitable for all types of traders, regardless of expertise. MT4 has become wildly popular for many reasons...

How to Scale up a Small Trading Account in Forex?

Many aspiring Forex traders have one really important question: how to scale up a small trading account in Forex more successfully? This is an important question...

Vantage information and reviews
Vantage
85%
FP Markets information and reviews
FP Markets
81%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.