With all the buzz surrounding inflation these days, one must understand it and its effects on the economy. Simply put, inflation is the rise in prices of the various products and services that we avail. Companies increase the prices of their products and services if the cost of their resources, or input costs, increase. Rising prices affect businesses and individuals alike and every business tries to pass on the price rise to customers to cope up with the situation.
A thought for investors
If you are a regular investor, you will understand the bearing inflation has on investments. New investors must be acquainted with the effects inflation can have on the market. You will need to change your investment strategies accordingly to make sure that you beat the rate of inflation. While investing, assume a rate of inflation accordingly to the level it is at present. When you are calculating your returns, you must make sure that the rate of your returns beats the rate of inflation. For example, if the rate of inflation in a year is expected at 7% and your investment which matures then has a rate of interest at 8%, you are effectively beating inflation.
Financial statement of companies
The financial statements of companies are an important gauge for understanding inflation. The financial statement of a company includes theirs gains, asset value, expenses and even the past expenses. This way, you can calculate the difference between the margins, expenditure and income between then and now. The current situation of a company, and its future, becomes clear with the financial statement.
The market situation
When inflation is on the rise, retail product prices increase. Once you have seen the company’s financial statement, you will get a clear idea about the effect that will have on the prices of the company’s products and services.
Change in interest rates
Typically, the Reserve Bank of India changes interest rates depending on inflation levels. When inflation is high, banks encourage people to save more money. At this time, bank deposit rates are high and loans are expensive. When inflation is low, banks do the opposite to boost demand and growth.
Best time for investors
A rising inflation scenario is the best time for investors. They can park their money is gold as the metal is considered as a hedge against inflation. Gold prices appreciate even when inflation rises. As mentioned earlier, investors can also park their funds in bank fixed deposits etc. as interest rates are typically high in a rising inflation scenario. However, when it comes to stocks, factors other than inflation also need to be considered before investing.