Plus500 does not provide CFD services to residents of the United States. Visit our U.S. website at

Here’s What You Need to Know About Inflation

Plus500 | Monday 08 April 2024

Once again, one of the most talked-about issues facing global markets at the moment is that of inflation. Two major American economic indicators, the Consumer Price Index (CPI) and the Producer Price Index (PPI), are set to hit the markets on the 10th and 11th of April, 2024, respectively. 

How the market mood on trading floors from New York to Tokyo will react to these important measures of inflation remains to be seen. But first, let’s take a look at the definitions and mechanics of inflation itself:


What Is Inflation?

The so-called ‘ideal’ rate of inflation, as defined by central bank economists, is about two percent per year. This is to say, in times of healthy economic growth, prices of a range of consumer goods will be about 2% more expensive every year.

However, inflation can increase at rates beyond this measure because of phenomena both on the production and supply sides of the economy. If the costs of producing certain goods go up, due to supply chain issues or shortages, for example, manufacturers may pass the costs on to consumers, causing a price increase. 

Conversely, when demand for certain goods hits an uptrend, prices may rise in tandem. If a certain nation’s supply of credit or money allows citizens to increase consumption beyond the marketplace’s ability to supply goods, the increased demand and limited supply raise prices.

The flipside of consumer goods rising in price is that it is accompanied by a decrease in the value of a nation’s currency. When products rise in price, each unit of monetary value is able to purchase fewer goods. For example, if it cost $40 for a consumer to fill up their car’s gas tank last year, but due to a rise in Oil prices it now costs $60 to purchase the same quantity of petroleum, the value of their salary has declined, as it is now able to afford them less gas. This is where monetary policy, usually determined by central banks like the Federal Reserve or Bank of England, comes in.

Inflation and Monetary Policy

As aforementioned, most central banks set an annual inflation rate of around two to three percent as their target. An exceedingly low rate of inflation, or even deflation, when prices are falling, can be taken as a sign of weak macroeconomic conditions in a country’s economy. This phenomenon can be observed when supply outpaces demand, caused by more consumers choosing to save rather than spend, or by increased production spurred by lower input costs. Falling prices can also lead to declining wages.

On the other hand, when inflation rises above the target range, wages can struggle to keep up, making it hard for citizens to maintain their standard of living. In conditions of hyperinflation, prices rise by 50% or more over the course of a month, often stimulated by external shocks such as geopolitical conflict as well as excessive money printing by central banks. In times of hyperinflation, basic goods needed for economic activity like wheat (zw) or oil can become scarce. 

accordingly, central banks use the tools at their disposal in order to maintain price stability, a steady rise in prices that neither falls into deflation nor rises into hyperinflation. while in the past, monetary authorities often printed money in order to directly influence money supply on the national economy, today’s central banks prefer to use what are called ‘open market operations’, or the buying and selling of government bonds. for example, throughout the course of the coronavirus pandemic, the federal reserve purchased large quantities of government bonds so as to support the american economy.

when a central bank moves to buy government bonds from private market actors, the money supply is increased. the inverse is true when monetary policymaking bodies like the federal reserve decide to sell their government bond holdings. central banks are especially prone to attempt to increase the money supply in times of reduced economic activity, such as that experienced in the wake of the covid-19 pandemic.

why inflation’s happening now

prior to the breakout of the global coronavirus pandemic, most central banks across the globe were hewing to a so-called ‘dovish’ monetary policy, using the tools at their disposal to stimulate the domestic economy. in the united states, for example, the federal reserve kept interest rates low to avoid economic crisis as wide swathes of the marketplace were paralysed by infection containment measures.

however, the emergency measures keeping interest rates ultra-low contributed to the current conundrum facing american policymakers, and the Federal Open Market Committee’s (FOMC) decision calculus has shifted. The economy was so stimulated by the Fed’s ‘easy money’, low-interest rate policies that consumer demand rose too quickly for supplies to keep up. Shipping lines around the world simply couldn’t get goods to market fast enough, and producers raised prices to profit from increased demand.

In recent years, inflation in the United States has continually broken records, with year-over-year price rises the highest seen since the first Reagan administration. Accordingly, the Federal Reserve saw fit to begin a series of interest rate hikes so as to rein in inflation. 

With the cost of borrowing still relatively high in the United States, some business leaders and consumers alike may be itching for a cut in interest rates. However, at the beginning of this month, Fed Chairman Jerome Powell made clear that from his perspective, the time is not yet ripe for such a change of course in monetary policy. In response, several major Indices dropped from recent highs on April 1st. A repeat of this trend could be seen in the coming days depending on how the CPI and PPI inflation reports pan out. 

Oil (CL) prices are also on a current upswing in response to geopolitical conflicts in the Middle East. Beyond the immediate concerns stemming from the price producers pay at the pump, crude is a key input in a variety of manufacturing processes, so producers tend to pass the rise in petrol prices on to the consumer when Oil demand rises. 

Therefore, inflation is commonly observed in the aftermath of a steep rise in Oil’s cost per barrel. According to Federal Reserve Chair Jerome Powell’s Senate testimony in March of 2022, inflation rises by one-fifth of a percentage point every time that Oil rises by $10 in its price per barrel on average. This being so, Oil’s over 2.2% price rise over the past week could be worrying traders and investors alike ahead of this week’s economic releases. Although black gold’s price per barrel is trending slightly downward as of the time of writing, this important inflation component’s near-term trajectory is far from clear. 

How Might Traders Respond?

Indices themselves may often shift in response to changing macroeconomic conditions and monetary policy. Interest rate hikes, often implemented to tame inflation, generally lead to a slowdown in economic growth. Tech and growth stocks, defined as those which grow more quickly than industry averages, are especially vulnerable to higher interest rates’ effects on their bottom line. This is because traders are more likely to invest in venerable firms with proven, reliable cash flows when interest rates rise. Accordingly, Indices like the tech-heavy Nasdaq (US-Tech 100) may experience downturns following a tightening of monetary policy.

Conversely, value stocks, defined as those with low share prices relative to their business fundamentals, tend to be less affected by interest rates, as investors positively rate the likelihood of receiving a return on their investment when compared to other stocks. Firms like Citigroup (C) and Unilever (ULVR-L) have been named by many analysts as value stocks, so they may stand to be less negatively impacted by the Fed’s continued hawkish stance.

However, it is important to note that past performance does not reflect future results. In addition, much of what may occur following this week’s economic releases will depend on whether the prediction of a further moderation in annualised consumer price hikes are borne out or not. If the CPI and PPI show that current monetary policy measures are succeeding in their aim of lowering inflation nearer to the ‘ideal’ rate of 2%, expectations of the Fed moving to cut interest rates by up to 4% by the end of the year. However, if inflation turns out to still be untamed, Wall Street’s market mood could suffer accordingly. (Source: Yahoo Finance)

The uptrends observed last Thursday, with the Nasdaq (US-TECH 100) moving up by 1.2% and the S&P 500 and Dow Jones (USA 30) by 1.1% and 0.8% respectively, could turn out to be fragile and all-too-reversible.

Much is still up in the air when it comes to inflationary pressures currently dominant in the United States and other major economies. Whether central banks will succeed in taming runaway price increases as geopolitical tensions rise, and how trading floors from Hong Kong to Manhattan will respond, is yet to be determined. 

Get more from Plus500

Expand Your Knowledge

Videos & Articles help you expand your trading knowledge.

Prepare Your Trades

Our Economic calendar helps you explore global market events.

Trade Without Surprises

Understand the full costs of your trades now for better expense management later.

This information is written by Plus500 Ltd. The information is provided for general purposes only, and does not take into account any personal circumstances or objectives. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. No representation or warranty is given as to the accuracy or completeness of this information. It does not constitute financial, investment or other advice on which you can rely. Any references to past performance, historical returns, future projections, and statistical forecasts are no guarantee of future returns or future performance. Plus500 will not be held responsible for any use that may be made of this information and for any consequences that may result from such use. Hence, any person acting based on this information does so at their own discretion. The information has not been prepared in accordance with legal requirements designed to promote the independence of investment research.

Need Help?
24/7 Support