Stock prices aren’t typically negatively affected by inflation because most companies are able to raise prices in line with inflation.This means companies are not selling at a price below inflation. 📈
What does this mean?
If a company were to keep selling their goods at the same prices after inflation rose, this will mean they are now taking less money for the same goods. This is because the buying power of the money they receive from sales is now less. E.g they sell a loaf of bread for £2, if they were to attempt to buy the same loaf of bread from another vendor £2 will not be enough as the vendor will have raised their prices in line with inflation. E.g £2.20 for a loaf of bread.🌐
If wages and other measures of inflation go up by 1% per year then companies can probably raise their prices by about the same amount.
Not all companies can raise prices and expect demand for their products to stay the same.🎈
E.g if non essential items such as luxury holidays rise in price, people are less likely to purchase them but if petrol rises in price then people will still purchase as it is an essential ingredient.So companies selling non essential products may take the hit when inflation rises and this could affect their stock prices.
Investors who hold fixed income investments such as bonds will also take a hit when inflation rises as the original capital they invested is worth less and their income will buy them less goods as the value of money is falling.
And, that’s why bonds perform poorly when inflation rises – they pay investors a fixed amount of interest that is gradually worth less as inflation increases.
Investors will need to be on an interest rate that is higher than the rate of inflation to see any real earnings.