Apple picker Commercial message: Why is inflation important? Will the inflation rate rise even more? Which inflation indicators need to be monitored and which instruments can be a natural hedge against inflation? These and many other questions related to investing during high inflationary pressure are covered in the latest report from XTB analysts.
Inflation is the change in prices over a period of time and is undoubtedly one of the main factors affecting the economy. The inflation rate is also one of the most important indicators for both consumers and investors. It determines the real value of cash and the value of an investment that changes over time. The dynamically changing rate of inflation represents a significant challenge for investors, and its influence on stock market indices, gold prices, and a whole range of other instruments is significant.
Pandemic and inflation
The restrictions associated with the COVID19 pandemic have plunged the global economy into a deep recession; oil prices temporarily fell below zero. Central bankers have spoken openly about the need to confront deflation. However, the macroeconomic situation has changed in recent months, as a result of individual countries coping better with the pandemic.
Inflation in the Czech Republic is starting to become a big topic again. The consumer price index rose by an unexpectedly high 3,1% in April, despite the fact that at the beginning of the year it was attacking the XNUMX% level. In recent years, Czechs have been used to a higher rate of inflation than residents of the Eurozone or the USA, but the current increase is even more threatening. It does not primarily concern our country, but has a global character. Massive monetary stimulus by central banks and fiscal stimulus by governments have kicked the global economy out of the post-Covid shock. The CNB, like the Fed or the ECB, still keeps interest rates close to zero. Sufficient liquidity increases the demand not only for consumer goods, but also the prices of producers and in the construction industry, which reacts to rising commodity prices, are rising massively. Inflation is something to be concerned about because it is the purchasing power of all of our savings. The solution is suitable investments, whose price growth is a defense against the devaluation of savings. The situation is not simple, as the prices of many assets have already responded by rising. However, suitable investment opportunities can still be found on the market, and an investor can come out of the race with inflation with honor - said Jiří Tyleček, an analyst at XTB, who was directly involved in the creation inflation-focused manuals.
Central banks around the world have been surprised by the strength of the recovery and rising costs, which are encouraging firms to raise prices. The interventionism that saved the global economy from collapse resulted in households sometimes having higher incomes than if the pandemic had not occurred at all. At the same time, the loose money policy encouraged investors to seek alternatives to cash. This had a significant impact on raw material prices, which increased additional costs for the entire company. How should investors behave in such a situation?
"In this report, we focus on inflation in the US, as it will determine the policy of the Fed, which in turn is of key importance for global markets, including the zloty and the Warsaw Stock Exchange. We explain which inflation indicators to watch and which inflation data publications are most important. We also answer the key question asked by professional investors and households – will inflation rise?”, adds Przemysław Kwiecień, chief analyst at XTB.
Five reasons for increasing inflation
When building an investment portfolio, every investor should take into account a number of factors that can affect the overall efficiency of investments. Inflation undoubtedly belongs to this group. XTB analysts distinguished five indicators in relation to the US economy that may indicate further increases in the inflation rate:
1. Money transfers are huge - because of direct payments, unemployment benefits and other support, American households have more money than they ever would without the pandemic!
2. Lag demand is strong – consumers could not spend on a full range of goods or services. After the economy opens, they will catch up with their consumption
3. Commodity prices are rising sharply – it's not just about oil. Look at copper, cotton, grains - the rapid rise in prices is the result of loose monetary policy. Investors are looking for the best valuation and until recently low commodity prices (compared to stocks) were tempting!
4. Costs of COVID – the economy is opening up again, but we can continue to expect increased hygiene costs
For more information on investing in times of increased inflationary pressure, see the report on this page.
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