Market Inflation

Inflation consists in a loss of the acquisition value of money as a consequence of the rising of prices; it also has its influence in the stock exchange market quotations. If there is inflation, the investors have to get a higher profit than the usual one because if not, they will lose their acquisition power.

For example, if the inflation rate (price index of consumption products) is of 10% a year, the minimum profitability to obtain in any investment should be of 10% a year, if not, the effective profitability will be negative. In other words, if inflation is of 10% a year and the profitability of an investment is also of 10% a year. The real profitability that will be obtained discounting devaluation provoked by inflation will be of 0%. 

For this reason, when inflation is too high, the offered profitability of the securities must increase due that if not, they would cease to be profitable for the investors. Usually, when the inflation is high the fluency of investor in the market diminishes,  above all with fixed interest securities. But also, the diminishing of the rate of inflation makes investing in securities more attractive and provokes an increase in the quotations.

In the first phase of the inflation, above all when the real profitability of the interests are negative , the investors try to protect their capital with growth investments that traditionally are the investments in variable interests. Because of it, the demands on shares increase and the quotations rise.

Also, on the first phases, the tendency from part of the consumers to expend increases, for which the companies invest, produce more and obtain better results. However, it results to be negative circle if the period of inflation lasts too long, due that it provokes an increase in the costs of production and the loss of acquisition capacity of the consumers, which brings a diminishing of the sales and a deterioration of the account results.

The disappearance of the expectation of growth of the earnings makes the investment in shares to stop being attractive, and the market is on the point of dropping. In synthesis, inflation usually provokes a rise in the quotations of the shares in its first phase that consumes itself and generates a fall when inflation lasts too long.

On the other hand, central banks usually react before the risings of inflation by increasing the types of interests to cool out the economy. Because of the raise of types of interests encourages the fall of quotations, the appearance of inflation generates negative reactions on the markets, due that the analysts tend to think that these flows of inflation are accompanied by the rising of the type of interests.

Beginner Money Investing Analysis of the Economic Juncture & of the Moment Types of Interest Market Inflation Economic Policies Psychology of investors and other aspects that affect the stock exchange climate Market Variations Summary