why is raising inflation a big deal for the stock market?

Answer 1

The two factors of the economy that have the most input on our everday lives are inflation and interest rates. These two factors are tied at the hip to one another. If inflation is thought to be on the rise, the federal reserve steps in to act like the jockey on a racehorse. They will pull back on the reigns a bit by raising interest rates. In order to raise interest rates they have to go on the open market and buy US treasuries. Because they are buying US treasuries this has the affect of reducing the amount of cash in the monetary system. The pace of the economy as measured by inflation will then slow because there is less cash floating around in the monetary system. If inflation is well in check and not thought to be a problem at all the federal reserve can act in the exact opposite direction. They can give the horse a little more freedom by lowering interest rates. They lower interest rates by selling US Treasuries. This has the affect of putting more cash into the monetary system. Because of the multiplier affect of money, the result should be more economic growth.
The raising and lowering of interest rates directly affects us by affecting the interest rates we pay on credit cards, new home loans, arm loans, and installment loans. I didn't mention this because I thought it was obvious but raising inflation will also affect the amount you pay for food, cars, clothes, and hookers. virtually everything that you might buy. I hope that this was helpful.

Answer 2

If you own a company, your profits are likely to fall if inflation is high. One reason for this is that you Cost of Goods Sold increases. If you keep prices the same, then your profits fall because it caosts you more to make the product. You might respond by raising your prices so you can get back your profit margin. But raising your prices causes demand to fall -- so your profits go down because you don't sell as much.

Either way, your profits decline. If your profits decline, the value of your company declines. If that happens, your company's stock price declines.

Since this happens to lots of companies, the stock market declines -- and some people think that is a big deal.

Answer 3

cuase it means, no matter how much the politicians lie. The economy is doing really bad. Inflation means that the currency of the country that has inflations is worth less compared that with other countries. For example when the Euro first came to the market, it would take about 1.2 Euros to make a Dollar, now it takes about 1.4 Dollars to make a Euro. This is bad for companies in that the stock holders will want to sell there stocks in U.S. companies inorder to invest in foriegn companies because their currancy is worth more. So when more people sell stocks than people that are willing to buy it the price of stocks goes down. Because there is a greater supply than demand. This is the basis of elasticity.

Answer 4

Inflation, a broad increase in the price of goods and services, can have several negative impacts:

It decreases the purchasing power of those whose incomes do not increase as much as prices are increasing. Suppose you made $30,000 per year, you spend $26,000 per year on food, utilities, etc. and have $4,000 discretionary income. Then prices go up 10% so now you have to spend $28,600 to pay for the same stuff that $26,000 used to buy so you only have $1,400 discretionary income. Guess who won't be doing as much shopping?

Inflation is also harmful to companies if the cost of producing their products goes up faster than they can raise their prices. That reduces their profits or even turns a profitable company into an unprofitable one.

Inflation automatically raises taxes. Suppose you made $30,000 last year, prices went up 10%, but you got a 10% raise. You are just as well off, right? Wrong, because when you got that raise you started paying higher taxes so your spending power actually went down compared to last year.

Inflation hurts those who own cash because the real value of cash is what it can buy in the future. Suppose you have money in the bank earning 5% but inflation is 7%. Every year your account grows (and you pay taxes on that growth) but every year your account is actually worth less.

The expectation of inflation causes more inflation. Suppose that bank account of yours was to be used to save money to buy a car. You are earning 5% but you realize the price of the cars is going up by 10% each year. You might decide the you are more likely to get that car if you buy it now before the price goes up, even if you have to borrow to do that. Now suppose everyone else thinks the same way - this feeding frenzy of spending causes the prices of the cars to go up even more than before.

Inflation discourages saving and investing. Again why would you buy an investment that might earn 8% if inflation is 10%? Less money willing to invest means lower prices on investments.

Inflation is not bad for everyone though. Suppose you have a lot of low interest debt and hardly any cash. Inflation kicks in, you start getting bigger raises every year so you get to pay that debt off with "easy money". Even better if you used that money you borrowed to buy an appreciating asset (like a house) because inflation increases the value of that asset more quickly.

Answer 5

Even the chinese will end making an investment is US securities. If the authorities keeps printing money on the speed that is, that is purely no longer lengthy earlier hyperinflation units in, and also you would possibly want to work out a doubling of costs each day. finally, the authorities is purely no longer waiting to pay even the activity on the debt, and at that aspect the authorities will fall down and the dollar will change into valueless. the country will fall down and there'll be anarchy and rioting contained in the streets. it really is what we ought to look ahead to.

Answer 6

Imagine your new Toyota Camry 2007 cost $19,999.99 USD and suddenly inflation goes up 50%

Your new toyota Camry 2008 costs $24,999.99 USD.

The number of Toyotas sold in 2008 would drop and that would reduce profits and less plants opening and more plants closing and less employment and more crimes...

You get the idea.

Top 3 Answerer in Business & Finance. (Vote for me)

Answer 7

The answer is, it isn't. However, the media has to sell some sizzle....so they hype up the one hot-button the general investing public doesn't like pushed.

Check out the link below to the research we did on interest rates and the market....interesting disconnect between 'what is' and 'what is supposed to be'. Once again, the media got it wrong and investors suffered for it.

Answer 8

The $ buys less. It impacts on home building, ability to get loans and a lot more. It is preceived as being bad as it inhibits spending.