1 - http://www.flex-news-food.com/pages/29131/Argentina/argentina-govt-confronts-inflation-discount-fish.html 2 - http://www.philadelphiafed.org/publications/speeches/plosser/2010/01-12-10_entrepreneurs-forum.cfm
knowing that a hasty withdrawal of stimulus or an increase in lending rates to fight inflation might take them back into the hole. In his speech to the Entrepreneurs forum of Greater Philadelphia in January 2010, Charles L. Plosser, President and CEO of the Federal Reserve Bank of Philadelphia, comments ‘there appears to be considerable uncertainty about the prospects for inflation over the next two to five years. Inflation is a monetary phenomenon, and the stance of monetary policy has been very accommodative during the last 18 months. An appropriate exit strategy to withdraw or restrict the massive amount of liquidity that we have made available to the economy will have to be put into action to keep the inflation rate from rising to unacceptable levels. On the other hand, some believe that the high unemployment rate or economic slack will help keep inflation low, or perhaps even falling, for some time to come, thus obviating the need for an exit any time soon. These divergent forecasts will ultimately need to be reconciled’.
Inflation and Stocks – is there a link?
The link between the two may not be very evident, but on closer study there may be a connection after all. Inflation can affect the share prices of a company either way depending on its role in the supply chain or overall economy. As a producer, inflation would mean higher prices for the end product. This would possibly mean better margins (assuming that input price increase has not been significant). Better profits would mean better return on the shares of the company and therefore the share prices are likely to move up. However, higher prices would also mean diminished demand for the product and therefore could affect the performance of the company.
items to ensure domestic demand is met first. Also, creation of good infrastructure like ports, roads, warehousing, etc will ensure that the goods produced reach the market fast without much wastage.
What are the causes for the current inflationary cycle?
Inflation in many economies has touched double digit figures. As the common man struggles to make sense of the whole thing (limited wage increase and unlimited inflation), Governments are trying different measures that may work to keep the prices down.
Among the main triggers of the current inflationary cycle has been the global economic crisis. As governments tried to cope with the slow down, recession and deflation in some cases, cheap money was pumped into the system in the form of economic stimulus and low interest rates. Governments seem to be in a tight spot
THE -ELEVATOR.COM THE -ELEVATOR.COM
As a trading company which controls the inventories available in the market, inflation would mean higher margins and therefore better profits. With low overheads, trading firms are likely to gain in the stock markets.
As a financial institution, things may be a little more complicated and it is mostly dependent on the financial health of its customers.
As a company buying raw materials affected by inflation, a higher rate means increase in costs and therefore reduction in profits. Stock prices may get affected unless the increased input costs are offset with better sales figures and the ability to pass on the price increase to the final buyer. There may be limitations in doing this especially if the company has international competitors who may not be affected by inflation and therefore do not have to raise prices.
As a long term investor in the stock market, stocks act as a good hedging tool against inflation as a company’s earnings are most likely to grow at the same pace.
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