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How does inflation affect markets? - NFG Finance explains

Started by Admin, Jul 20, 2023, 06:52 PM

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In the fall of 2022, inflation was a major topic in the stock market. Over 33% of portfolio managers surveyed by Bank of America identified rapid price increases as one of the main risks in 2023. Let's take a closer look at how things may unfold in an article written in collaboration with experts from Forex broker NFG Finance.

What is inflation?

Put simply, it is the rate at which prices rise or fall over time.
Low inflation is considered a favorable factor for a country's economic growth, while high inflation, on the contrary, indicates a disruption in the trade balance (the cost of goods is higher, foreign currency is lower).

Of course, inflation affects financial markets and transactions. A decrease in exchange rates negatively impacts the purchasing power of customers, which also reflects on interest rates.
NFG Finance broker publishes up-to-date forecasts that can help you choose suitable investment strategies and profit from various financial instruments. Moreover, they have filters in their economic calendar for searching data by countries or categories.

What are inflation expectations?

These are the anticipated levels of price increases in a specific time horizon. This indicator allows market participants to formulate further investment strategies. Inflation expectations can influence the sale of certain companies' stocks, interest rates, and bond yields.

The following factors are taken into account in forecasting future inflation:

  • Economic growth;
  • Devaluation (a decrease in the exchange rate of the national currency);
  • Indicators for previous years;
  • Level of financial literacy of respondents;
  • Economic shocks (wars, epidemics, natural disasters, catastrophes, etc.).

This all affects consumer behavior, changing the balance of supply and demand.

Inflation expectations can be of two types:

  • Rational. Forecasts based on in-depth analysis of all available information, including government monetary policy, previous inflation rates, and the overall state of the economy. In their calculations, NFG Finance takes into account market mechanisms and the reaction of supply and demand to inflation. Errors in this case can be minimal.
  • Adaptive. In this case, forecasts are based on past years' data and are more prone to errors as only one parameter is considered.

Economic expectations indicate the socio-economic development of a country and are reflected in population behavior and production indicators. In times of high inflation, people tend to invest in goods such as technology, real estate, automobiles, and precious metals that can maintain stability amid currency devaluation.

The impact of inflation on markets and where to invest?

According to experts at NFG Finance, inflation (reaching its highest levels in recent years) can significantly impact the stock market. Business costs for producing goods and services increase, leading to a decrease in profitability and margins, as it may not be possible to pass on all expenses to consumers.

Acceleration of inflation can lead to additional risks. Historically, during such periods, the real returns of stock markets tend to decline.

Companies in the biotechnology and technology sectors, often referred to as "growth companies," may be most affected in this situation.

Many experts highlight the following risk factors for the stock market:

  • Hawkish policy of the Federal Reserve;
  • Increasing prices of energy resources and commodities;
  • Uncertain relations between China and the United States;
  • Record-breaking inflation, reaching its highest level since 1982;
  • Full-scale invasion of Ukraine by Russia.

Broker NFG Finance recommends paying attention to the following ETFs:

  • XLB: Invests in companies in the chemical, metallurgical, mining, and paper industries;
  • SLV: Linked to the price of silver;
  • DBA, RJA, WEAT: Agricultural funds;
  • XLE: Provides liquid access to U.S. energy companies, including those involved in gas and oil;
  • XLF: Contains stocks of major U.S. banks;
  • XLU: Provides access to securities from the following sectors: green energy, water supply, and electricity;
  • XLV: Companies operating in the pharmaceutical and medical equipment manufacturing sectors.

It may also be worthwhile to increase investments in commodities, gold, and stocks, as they tend to perform well during inflation. The oil refining and infrastructure sectors may also serve as good hedges for investors.

Experts at NFG Finance note that while inflation does create risks, it also presents additional opportunities for profit.

What about bonds and real estate?

The high level of rising prices may reduce the yield of bonds. Bonds are a type of investment that pays a fixed percentage of income throughout the duration of the bond's term. Inflation can result in higher interest rates, which can impact profitability.

However, inflation-indexed bonds can be advantageous, as this type of investment automatically adjusts according to the level of inflation.

Real estate can be a good way to protect investments. Prices per square meter are also likely to increase, allowing owners to not only preserve the value of the asset but also earn significantly more.
However, high inflation levels can negatively impact the real estate market overall. Increased interest rates may lower demand, and many may have to forego mortgages. Plus, the costs of property maintenance will increase, resulting in decreased profitability in this segment.

Cryptocurrency and Inflation

The cryptocurrency market is highly volatile, which means that this type of currency is subject to inflation, with the exception of Bitcoin. Bitcoin allows for high profitability, surpassing the performance of other asset classes. It is considered the best investment of the decade, although it can also be unstable.

Cryptocurrencies are characterized by scarcity. In other words, the supply is limited, and the economic crisis triggered by the COVID-19 pandemic has led to a significant increase in the value of Bitcoin. However, at the same time, the value of stocks, gold, and oil has decreased.

Forex NFG Finance believes that cryptocurrency can be a good option for capital protection.


During periods of high inflation, markets can suffer, but investors can still protect their money. For example, they can invest in companies that produce goods with increased demand, inflation-indexed bonds, real estate, and cryptocurrency.

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