Inflation is the steady rise in the price level of an economy. But how does inflation occur? What are the causes? What can be done against inflation?
Prices are rising and money is losing valuet
Inflation is considered an overall economic problem
Most often, there are several causes for the emergence of inflation
A distinction must be made between deflation, disinflation, hyperinflation, and stagflation.
Inflation is the increased amount of money in circulation and a related increase in price levels. The prices of all products therefore rise continuously, one can buy less for one euro or dollar than before. Accordingly, the value of money, or purchasing power, decreases. Deflation is the opposite of inflation. Here, the prices of goods and services decrease in the long term and the value of money increases. Deflation, like inflation, has a negative impact on the economy, which is due to the fact that companies have to react to falling prices by, for example, optimizing their purchasing process, negotiating more strongly with suppliers, possibly laying off workers, lowering wages, reducing production and probably making less profit overall.
Deflation: a decline in the general price level (opposite of inflation).
Disinflation: decreasing growth of the price level
Hyperinflation: an inflationary spiral out of control (very strong inflation)
Stagflation: a combination of inflation, slow economic growth and high unemployment (worst-case scenario for an economy).
There are different ways to measure inflation. Costs for food, gasoline, oil, services and much more are included in the measurement. The costs of these goods and services are recorded in a so-called Consumer Price Index (CPI). In Germany, the inflation rate is measured and calculated by the Federal Statistical Office. The CPI measures the average price development of all goods and services consumed by private households in Germany on a monthly basis. The change in the consumer price index compared with the previous year is referred to as the inflation rate. To calculate the inflation rate, a fictitious basket of goods is used, which comprises 650 types of goods as a proxy for the needs of private households.
The emergence of inflation can have various causes. If the central bank wants to increase liquidity in the market, then inflation can occur. Thus, if people can spend more money as a result, demand increases. This in turn leads to an increase in prices, because the money supply increases faster than the available goods. Demand is greater than supply. Another possible cause. The increases in production costs, such as wage increases, rising commodity prices, supply chain problems. Since companies still want to make a profit, they raise their prices, which lowers the value of money because less can be bought with the same amount of money.
Summarized:
Rising consumption in private households
More business investment
Growing government investment spending
Export growth
Rising raw material and energy prices
Higher wages
There are a few ways to hedge against inflation. Real assets such as real estate and precious metals (gold, silver) offer good protection against inflation. Commodities, inflation-hedged bonds and, of course, stocks are other investment options. Keep in mind that not every asset class necessarily reacts the same way; for example, stocks are much more volatile in the short term during inflationary periods and offer less inflation protection if companies cannot fully pass on their rising purchase prices to consumers. If you're investing for the long term, stocks are a good way to counteract the decline in the value of money. Of course, ETFs also offer an even easier way to invest diversified in stocks, commodities and (inflation-protected) bonds.
Which key figures should you know? How do you use them in stock analysis?
