What Exactly Is Inflation and its impacts

How does inflation work?

Inflation is one of the things that can keep traders up all night   It's almost enough to send most people to sleep just hearing the word. in fact it sounds a bit like an illness - “I’m afraid you have inflation” . Investors are scared of inflation, just because they don't understand why. It can even bring down the entire stock market in some cases. Let's begin by understanding how the process works. How does inflation work? Inflation is simply an increase in prices. Remember when a bar of chocolate cost 15c? The price has gone up to like a dollar since then. Those are the effects of inflation. Isn't it always the case that train tickets get more expensive every year? The inflationary process. Price increases of 2% are referred to as inflation rates. Customers might be hacked off by this, but stocks shouldn't be scared by this, but why? Its natural

Inflation is simply an increase in prices. Remember when a bar of chocolate cost 15c? The price has gone up to like a dollar since then. Those are the effects of inflation. Isn't it always the case that train tickets get more expensive every year? The inflationary process. Price increases of 2% are referred to as inflation rates. Customers might be hacked off by this, but stocks shouldn't be scared by this, but why? Isn't it natural that companies should earn more revenue if prices do increase?

 It's important to remember that inflation doesn't just affect the goods on our shop shelves; it also has an impact on the raw materials involved in production. The prices may be higher, but the companies are also spending more. Second, our wages are a problem. Our wages will remain flat if prices rise, making us all poorer. This results in fewer purchases. Suppose you go to the pizzeria every weekend, but inflation kicks in. There is a $7 increase in the price of pizza and beer. Simply put, inflation results in people being unable to afford all their necessities. There is a tendency for company sales to decline, and profits to fall as well. Even those profits are worth less... Markets are terrified by inflation for a much bigger reason than that. Forecasts of future profits determine a company's value for an investor. With higher inflation, shareholders can buy less stuff with their profits. As a result, shares are perceived as having a lower value. Let me give you an example if that sounds confusing. Next year, I predict Facebook will make $7 per share in profit. It will be worth the same amount in a year if inflation is zero. With my $7, I will still buy the same amount of pizza. We'll assume that inflation is 2%. I won't be able to buy as much delicious, cheesy, pepperoni goodness with my $7 if pizza prices go up by 2%. Even if inflation rises to 3%, my $7 is worth less. A central bank's role Inflation is also scary for another reason: central banks raise interest rates when inflation exceeds certain levels (generally 2%). Don't ignore this (because it drives markets into a frenzy). We need something to counter inflation, which reduces the value of money in our pockets. That is exactly what happens when interest rates are raised. Consider it a see-saw. Inflation can be brought down by interest rates if it gets too high. How? Borrowing money costs interest. The value of money rises when interest rates rise. What the heck? Suppose you lend your mate $100 with a 5% interest rate. When he pays up, you'll get $110. However, if the interest rate is higher, say 10%, you will receive $120. The value of your money has increased. To control inflation, central banks raise interest rates. The economy and markets are also adversely affected by this move. If the interest rate rises, your bank will increase the rate on your credit card and mortgage (if you have a variable rate). Because of this, you have less money to spend. However, don't worry, we're all doing it when interest rates rise! As a result, companies earn less and make lower profits. The second point is that banks don't just raise their rates for you, they also raise them for their clients. Many companies are in debt to the tune of millions or billions of pounds, while you may have a mortgage and a few grand on a credit card. At the end of the year, if the bank raises the interest rate by 0.5% for a company that owes £1 billion, it will owe an additional $5 million. As a result, profits decline once again. Final thoughts

As a result of an increase in prices, entire economies can fall into recession. Our purchases of pizza and train tickets don't just affect us ordinary folk, but also the companies listed on the stock exchange and their shareholders. That's why investors worry about inflation, and maybe you should too.