How Inflation Impacts the Economy & Stock Market?

3 min read

There is a huge increase in inflation impacting the raw materials cost of the company on the global level. Inflation means a decrease in purchasing power. In India RBI (Reserve Bank of India) always tries to keep the inflation around 5%-6%. In recent months, the inflation rate in India crossed the ideal level of RBI and even exceeded the level of 7%. So let’s discuss how inflation impacts the overall economy and the stock market in detail in this article as we move ahead.

Reason for the Inflation:

  • Inflation occurs due to an increase in demand or decrease in supply.
  • Keeping the Demand as it is but there is a shortage of supply, which is a current reason for the inflation.
  • Supply chain issue is there due to Covid-19 and Ukraine Russia war, Covid-19 in China due to which the global supply chain got affected.
  • The supply chain is also get affected by worker shortages, and a strike of workers which can also be the reason for short-term inflation.
  • With more money supply in the economy and low-interest rates, the US government has given the money directly to retail investors, all these reasons have led to a rise in inflationary conditions.

Impact of Inflation on Companies:

  • The raw material price increased especially crude oil which is currently at a high of 7 to 8 years.
  • Raw material cost is increased so the company will eighter sacrifice the profit margin or will increase the selling price. A reduction in profit margin will impact the expansion plan of the company which will ultimately hamper the growth of the company.
  • A price increase will reduce the demand for the product which will affect the revenue of the company and then automatically profit will be impacted overall growth will be reduced. The inflation impact is systematically going like this.
  • The current inflation in the US is running at an all-time high of 40-50 years at 8.3% more than in India. Fuel is at 80% inflation, and energy is at 30% inflation. In India CPI (Consumer Price Index) is around 7%-8%+, and oil is in a double-digit increase.

Measures to Control Inflation:

  • RBI tries to kill the demand by increasing the interest rates. An increase in interest rate will increase the price of the loan, the company and public will reduce taking loans, and a reduction in loans will reduce the money between the company and public which will increase the saving rate and decrease the demand.
  • Another, way to reduce inflation is to change the fiscal policy, which means the government is reducing its expenses. These are two ways to control the inflation in the economy, currently, both measures have been taken to reduce the inflation. In monetary, RBI has increased the interest rate and in fiscal government has reduced the tax on the crude oil price.

What should investors do?

Inflation impacts the economy and company, it impacts every organization even a tech-based company. One should always know the current inflation going on and tries to invest in those securities giving a return more than the inflation rate.

Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.

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