By Richard Macrae Gordon - Founder

Inflation: What Just Happened?

May 12, 2021

Inflation simply means the rate at which a selection of goods and services are going up in price. It's important because sudden changes in inflation, can signal trouble in the economy - and trouble for investors.

If inflation is low, prices of goods and services are only rising slowly over time. This means that the Federal Reserve and other central banks can keep interest rates low, which keeps it cheap for people and companies to borrow money - and generally supports the value of investments like stocks and real estate.

If inflation is high, the prices of goods and services are rising quickly. As you might expect, this means that the Federal Reserve and other central banks may be forced increase interest rates, since that is the primary policy lever they can pull to keep inflation under control. If that happens, this may mean that many types of investments would automatically be worth less than they currently are.

And here lies the problem: with the higher than expected inflation reported today (4.2% reported vs. 3.6% expected) the Federal Reserve and their counterparts in other countries may be forced to increase interest rates in the near term, or at least to slow some of the other measures they're using to stimulate the economy. If that turns out to be the case,

As you might have seen, the news of a higher than expected inflation figure has met with instant turmoil in financial markets. Some investors have been panicking about this possibility for some time - and have been selling off some of their more 'expensive' assets (particularly tech stocks, which were sold off even more aggressively today).

What happens next with inflation is yet to be seen, however there is hope in some circles that the most recent inflation reading will be the peak - and that it will begin to calm from this point. There is some reason to believe that this won't be the case though. Anecdotal evidence suggests that inflation might even be gathering pace. Whatever the case, the thing every investor on earth will be watching is how the Federal Reserve chooses to respond over the coming weeks and months. Practically everything hinges on that.


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