How inflation affects SENSEX

The effect of inflation on stocks

When the rate of inflation rises, so does the number of people looking for an investment that will protect them from inflation.

The fear of inflation is currently very widespread, which is mainly due to the expansionary monetary policy. Because one connection is clear: if the amount of money increases, so do the prices of goods and services in many cases.

Often stocks are recommended as a good protection against inflation. Generalized in this way, this statement should be treated with caution, but it still has a real core.

To understand why stocks can be a good investment during times of anticipated inflation, one needs to look at the impact inflation has on stocks.

It all comes down to the choice of the stock

First of all, it must be clear that not all stocks need to offer good protection against rising inflation. Rather, it is important to consider various criteria when selecting the right stocks.

For example, it is advisable to bet on stocks of market-leading companies. Due to their power, these companies are better able to set higher prices for their products and thus counteract inflation.

Since a high rate of inflation does not usually occur all over the world at the same time, global companies are better protected. Declines in profits in one part of the world can be compensated for in other places.

Care should also be taken to ensure that the companies do not have excessive investment needs. High-tech companies must always have their systems up to date in order to remain competitive.

Further arguments in the selection of stocks should be the company's low level of debt and its broad independence from the business cycle.

How inflation affects stocks

If a good selection has been made, a stock can perform well even during inflation. After all, with the shares you own shares in a company, i.e. in real assets and know-how.

If, on the other hand, the money is in the bank, the bare number remains unchanged apart from the interest. You can then practically watch the value decrease through inflation.

A moderate rate of inflation can also be a motor for the economy. Consumers often tend to spend their money today before prices go up tomorrow.

This enables companies to increase production and sales, and prices can be expected to rise.

Beware of high inflation rates

It should also be noted, however, that inflation rates that are too high can have lasting damage to the economy. In this case, many people can suffer a loss of purchasing power because salaries or pensions cannot keep up with the general rate of inflation.

Banks will also charge higher interest rates when granting loans in order to compensate for the expected loss of value of the money and generally act more cautiously.

In such a case, stocks of carefully selected companies can also come under pressure. The safest haven is likely to be offered by companies that have a market-leading position in everyday products such as food.

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