Inflation refers to the rate at which the price level of goods and services in an economy increases over time. In other words, it refers to the decreasing purchasing power of a unit of a currency over time. Inflation can have a significant impact on financial markets, such as the stock, forex, and commodity markets.
Inflation is often measured by an economic indicator called the Consumer Price Index (CPI). The CPI is a basket of goods and services commonly purchased by consumers. When CPI increases, this means inflation is occurring. When inflation increases rapidly and uncontrollably, it becomes hyperinflation.
Inflation can impact the performance of the bond, stock, forex, and commodities market. This is because central banks tend to increase interest rates to curb inflation when it happens. With increased interest rates, the value of bonds decrease, causing bond investors to experience capital losses if they decide to sell their bonds before maturity.
Inflation can also impact exchange rates. When inflation occurs in a country, the purchasing power of its currency decreases. In other words, its currency weakens. This can cause its exchange rate to plummet when investors begin to seek higher returns elsewhere.
Finally, inflation can cause the price of commodity production to increase while decreasing consumer spending. This leads to higher prices for commodities and falling stock prices when the profits and revenues of companies decrease.
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