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Markets and Inflation

Generally speaking, stock prices shouldn’t be negatively affected by inflation because most companies should be able to raise prices by at least as much as inflation over time. I.e. if wages go up by, 2% a year then companies can probably raise their prices by about the same amount. This varies, however, depending on what a company sells: if gas prices have jumped, for example, then people might be less willing to buy discretionary items like designer clothing as they’re forced to pay up at the pump. But if diapers go up in price too, because gas prices make their transport to stores more expensive, parents will still be willing to buy them. Investors in assets that pay a fixed amount of interest (i.e. bonds) feel inflation’s pinch more. That’s because higher inflation means the value of money is eroding more quickly than it was before. If an investor earns a fixed amount, say $50,000 a year, from their investments, that money will buy fewer goods and services as inflation increases. And so it makes sense that the investments from which that income comes should be worth less, too – explaining why bonds perform poorly in an inflationary environment.

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