Tyson Clayton is a full-time Forex, equities and crypto trader, international speaker and markets instructor for Market Traders Institute. He’s trained thousands of investors worldwide inside his Money Flow and Equities on Demand trading rooms.
Inflation is on top of every serious investor’s mind these days. I think it’s palpable. With the Fed printing money out of thin air, it’s only going to get worse.
The reason inflation is a hot topic is it’s one economic problem that could upset the markets.
I believe it’s important that you are prepared for it.
Let me take you through what’s happening right now and how inflation can affect the markets.
How Hot is Inflation Right Now?
Data shows consumer expenditures rose at a 4.4% annual rate in September.
That’s the highest run-up of inflation we have seen in 30 years!
Excluding food and energy costs, the personal consumption expenditures price index rose at a 3.6% annual rate in September. That means price increases have continued even when some of the more volatile items are excluded.
The costs of compensation have jumped 1.3% for the three months ending in September – the largest increase since 2001.
All this is worrisome as Fed officials have marked their inflation outlook for 2021 at 2%.
But by September we have seen inflation running at twice the Fed’s 2% target.
On top of that is a lot of money pumped up into the markets through the stimulus checks.
How Inflation Affects You and Your Investments
The drill is simple…
If inflation doesn’t come under control and remains at elevated levels, it can raise the cost of living for a common man. It can make day-to-day items expensive, thus forcing him to dip into his savings or cut down on his expenses or both.
For the markets, rising inflation is usually a negative as it increases borrowing costs and input costs, and reduces standards of living. All of this affects sectors and companies, which in turn mean a gloomy outlook for markets as well.
What If Inflation Keeps Rising in 2022?
Markets react much more negatively to inflation when the economy is contracting.
As we know it, the US economy is recovering from the slowdown it witnessed during the pandemic. So, any further rise in inflation will only make things worse.
What’s more, it can even lead to an interest rate hike by the Fed. And a rate hike would be detrimental for the recovery in economic growth and investments.
In short, inflationary pressure could pose a downside risk to stock markets.
Apart from the stocks, inflation also impacts the US dollar.
Rising inflation typically undermines the dollar’s strength by diminishing its spending power. In simple terms, it erodes the value of the dollar.
This further impacts the currency markets and currency traders. If a country’s inflation rate is higher than that of another, its currency decreases in value. So, for example, if the inflation rate in the US is higher than the inflation rate in Japan, the US dollar may witness a decrease in value against the Japanese yen. And this will have an impact on USD/JPY trades.
So far, the Fed has shown no intention of taking tough measures to curb rising prices.
It left interest rates near zero in its policy meeting last week and announced purchases of at least $120 billion worth of bonds each month.
All this could mean lower borrowing costs and further rise in prices.
It’s surprising the Fed thinks this rise is transitory. I hope this turns out to be true.
Nevertheless, I believe it’s important to know how you can be prepared for it.
It’s because inflation is already affecting your investments. And the strategy that you followed successfully during low inflation won’t work when inflation goes up.
If you want to make long-term profits in the market, you need to know the best way to tackle these periods.
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