How Inflation Can Impact Securities and Investments

By: Montana Timpson

Inflation affects all aspects of the economy, from consumer spending, business investment and employment rates to government programs, tax policies and interest rates. For the professional trader, understanding inflation is crucial, because fluctuations in inflation can have a robust effect on the value of investment returns.

Understanding Inflation
By definition, inflation is a sustained rise in price levels, measured by the Bureau of Labor Statistics (BLS). The BLS is responsible for two key inflation indicators: the Consumer Price Index (CPI) and Producer Price Index (PPI). CPI, which reflects retail prices of goods and services, including housing costs, transportation, and healthcare, is often the most widely followed indicator of inflation.

As an economy grows, demand typically outstrips the supply of available goods and services, and as a result, the rate of inflation increases. If economic growth accelerates rapidly, an upward price spiral, sometimes called “runaway inflation” or “hyperinflation,” can result.

In contrast, when economic growth begins to slow, demand eases and the supply of goods increases relative to demand. At this point, the rate of inflation usually drops. This period of falling inflation is often referred to as “disinflation.”

Inflation and Investment Returns
For investors aimed at increasing long-term purchasing power, inflation rates can pose a threat of decreasing real savings and investment returns, but for active traders, inflation may pose valuable trading opportunities as the prices of securities rise and fall in line with inflation rates over the long term.

Unlike bonds, where the purchasing power of the interest payments declines, securities often see a rise in price as inflation increases. Equities have often been a good investment relative to inflation over time because companies can raise prices for their products when their costs increase in an inflationary environment. In this way, higher prices often translate into higher earnings. However, over shorter time periods, stocks have often shown a negative correlation to inflation and can be especially hurt by unexpected inflation. When inflation rises suddenly or unexpectedly, it can heighten uncertainty in the economy, leading to lower earnings forecasts for companies and lower equity prices.

For more information, visit Lightspeed’s Trading Education Center, featuring a comprehensive glossary for professional traders. For additional references, guides and resources, view our Active Trading Blog and register now for our next live webinar.

Active Trading with Lightspeed
Lightspeed provides professional traders with all the tools required to help them find success in stock trading, and we have been developing and honing our active trader platform to offer an optimal user experience. With the intuitive interface layouts and institutional quality stock and options scanners, we aim to help traders reach their goals, no matter what their strategy is. We also offer our clients some of the lowest trading fees in the industry.

For more information on a professional trading platform with Lightspeed, please call us at 1-888-577-3123, request a demo, or open an account.

Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content are solely based on the users’ independent analyses taking into consideration your financial circumstances, investment objectives, and risk tolerance.

You may also be interested in...

Support and Resistance: Technical Analysis Techniques and Advanced Trading Strategies
Read More
The IPOX® Week, April 12th, 2021
Read More
Democracy Is Back in U.S. Stocks
Read More
The 10 Most and Least Popular ETFs in the First Quarter
Read More

Try the demo

Compare Platforms
Check the background of this firm on FINRA's BrokerCheck

Our website uses cookies to improve the performance of our site, to analyze the traffic to our site, and to personalize your experience of the site. You can control cookies through your browser settings. Please find more information on the cookies used on our site in our Privacy Policy. By clicking OK, you agree to allow us to collect information through cookies.

OK