Inflation is here…but what does that mean for your investments?
The stock market has been on a roller coaster ride in recent years. The Federal Reserve’s policy of low interest rates and quantitative easing has created an environment that is ripe for inflation. What happens to your investments when there is high inflation?
In this article, we will discuss how the policies of the Federal Reserve can impact stock prices due to inflation!
What Is The Value Of A Dollar?
The value of a dollar is constantly changing and fluctuating — this can be seen by looking at the Consumer Price Index (CPI). The CPI measures how much prices for consumer goods are going up or down in comparison to previous years, and what we’re seeing now is that they’re increasing! And that means there is inflation.
In times of rising inflation, the Federal Reserve will raise interest rates in order to make it more expensive for businesses and individuals to borrow money, as borrowing money becomes riskier with higher inflation. The result of this is that people will save their money instead of spending it because they’re worried about the value decreasing even further!
Investors need to be aware of this and understand how it can affect their investments — with inflation, the purchasing power decreases over time which affects stock prices! One of the most famous examples of this was during World War II when inflation rates were 24% and consumer goods were scarce. Worse, the federal government was issuing a lot of new currency to pay for war expenses. As a result, there were more paper dollars in circulation than there were goods and products on the market!
The stock market showed a dramatic increase in value during this time, but when the war ended and people stopped worrying about getting goods for high prices, inflation rates dropped back down. The effect was that investors saw their investments shrink in value over the course of just a few years due to these unexpected changes in consumer behavior from rising inflation rates.