Inflation in the News: What it Means for Prices, Pay and Markets
Inflation is a phenomenon that involves a general increase in prices and, as a result, affects the cost of living and financial choices.
The news often reports on this topic, providing not only information about the increase or decrease in inflation over a certain period of time, but also useful analysis of it impacts on salaries and markets. Keeping abreast of these updates is a sensible way of making informed decisions particularly with investments. Depending on the economic trends and forecasts, you can decide, with the help of experts, whether to invest with Moneyfarm, buy or sell shares, and so on.
In this article, we’ll break down what inflation is and what the news generally says about its impact on markets, prices and salaries.
What Is Inflation?
When we talk about inflation, we are not referring to any increase in consumer prices, like on a particular product or service. The term is only used to describe a generalised increase that affects the price of all services and products people buy, and that occur within a well-defined period of time.
The news, might report that inflation is either going up or down, and this is due to different causes. One of the main causes is the balance between supply and demand. For example, when demand for goods and services rises, but the production remains stable, companies tend to raise their prices. In this case, there is an increase in inflation caused by supply being unable to meet demand.
Other factors that can cause inflation to change include:
- the amount of floating money: if this increases but production doesn’t keep up, inflation will usually rise. It’s a case of “too much money chasing too few goods”.
- production costs: if it is cheaper for a company to make a product, they can sell it for less, and this helps to lower inflation.
- the value of money: when floating money is devalued, the cost of living goes up and, as a result, inflation rises too.
On top of this, tax levels and some unforeseeable events can also cause widespread changes in prices.
Markets and Inflation
Inflation has a strong impact on stock and bond markets, and the news often provides interesting details on this, especially when referring to the monetary policies adopted by central banks as a direct consequence of rising prices.
In the United Kingdom, inflation can be countered by measures taken by the Bank of England, which may decide to raise interest rates in order to curb inflation and make prices more stable. This move inevitably affects not only citizens and companies, but also the stock and bond markets, which are already affected by inflation. But what exactly does inflation mean for these markets? For the stock market, high inflation, which translates into lower profit margins for companies, also affects the yield on securities and makes them more volatile. For the bond market, rising inflation usually leads to higher yields, which must compensate for inflation risk, and lower bond prices.
How Inflation Affects Prices and Wages
When the news covers inflation, the first thing mentioned is always its effect on prices. This is directly linked to the cost of living, which generally goes up and down in line with the inflation rate, and to the impact it has on consumers.
On the other hand, when the discussion turns to salaries during a high-inflation period, the news usually isn’t positive. Salaries are not automatically adjusted to reflect increases in prices and the cost of living, which can make it even more difficult for workers to make ends meet.