How Does Inflation Affect the Stock Market?

Inflation impacts the stock market because the prices of goods and services increase, and people’s purchasing power decreases. This, in turn, affects companies’ performances, which can affect the markets.

Inflation’s impact on the stock market, explained

Inflation refers to the trend of increasing prices on consumer goods and services over time—and the resulting reduction of consumers’ purchasing power.

Inflation generally means that there’s a greater demand for goods and services than a supply of them, which translates to shortages and, ultimately, hefty price jumps.

Economists measure the upticks and downticks to find the inflation rate. Many central banks aim to keep the inflation rate around two to three percent each year. However, it can jump much higher as Americans are spend more..

Here are some obvious industries in which we feel the impact of inflation the most:

• Housing market
• Food sector
• Fuel economy
• Consumer goods

But inflation doesn’t just affect one industry or another at a given time. It impacts the entire economy and the stock market as a whole.

However, it’s important to note that most economists generally consider inflation to be neutral—neither good nor bad. They largely agree that, while inflation can take a toll on people’s pockets and the stock markets, some inflation is generally a sign of a healthy economy..

What this means for you

If inflation is high, your money won’t go as far. This means two things:

• People buy less goods and services, which hurts companies’ performances, which could hurt your portfolio.
• The dollars you’ve invested in your portfolio carry less weight because inflation decreases the value of a given currency.

There are two key areas affected by inflation that investors should watch:

• Supply chain
• Consumer stocks

Bottlenecks in the supply chain force companies to increase their prices. Even some companies or industries that don’t directly witness colossal changes in demand may have to cut down on their supply and bring up their prices in response to other shortages, somewhere along the way, affect them.

Meanwhile, consumer stocks tend to be more volatile during periods of high inflation. 

One way how to protect against inflation is to diversify, diversify, diversify. Your portfolio should be diverse across alternative assets and industries alike.

Q.ai’s Inflation Kit will handle diversification for you. Learn more about the Inflation Kit and what it can do for your investments.