When inflation rises, the cost of living increases with it, reducing your purchasing power. Many people are perplexed and interested in learning more about inflation as a business word. They want to know what it is, what produces it, what happens when it rises, and what effect it has on your wallet.
Inflation is not the boogeyman that many people believe it to be. In reality, a gradual increase in inflation is a sign of a healthy economy. Ravi Singhal, Vice Chairman of GCL Securities, discusses inflation from several perspectives and how it would affect the stock market in the coming months: –
Inflation gets defined as a rise in the price of goods and services over time. When inflation rises, the cost of living increases with it, reducing your purchasing power.
What are the main factors that contribute to inflation?
The two factors that mainly contributes to inflation are:
- The rising cost of production
What effect does rising inflation have on the stock market?
In the case of dividend-paying stocks,
A decline in their market price can be caused by an increase in the rate of inflation. That is because, if inflation rates rise, dividends may not be able to keep up with inflation, making the stock less appealing to investors.
In the case of metal stocks
As inflation rises, raw material prices rise, assisting scrips in growing profits while metal users as components see their gains decline.
Stocks with high debt levels will get hit harder when the RBI raises interest rates.
Inflationary Impact on Value vs. Growth Stocks
In a nutshell, stock prices are typically proportionate to the rate of inflation. As a result, when the rate of inflation rises, value equities tend to outperform.
Growth stocks, on the other hand, have very little cash flow. As a result, they have a negative relationship with inflation. When the rate of inflation rises, the market price of these equities falls.
Long-term investors should keep in mind that the government is continually taking steps to keep inflation under control. As a result, investors should not worry when inflation rises to avoid making emotional decisions.
Furthermore, investors must seek out fundamentally sound stocks that can weather any economic crisis.
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