Inflation has been soaring in many rich countries for the past year – heading towards double-digits and reaching levels not seen since the 1980s. To read more of our analysis on Capital.com, go here:

We’ve examined data for five key asset classes – the U.S. dollar, gold, U.S. stock sectors, oil and U.S. Treasury Bonds – to explain how they have historically performed when the U.S. rate of inflation pushes above 5%.

0:00 Are we in an era of high inflation?
01:00 How the markets react during high inflation
01:49 Why is inflation problematic?
02:45 How do energy commodities perform during high inflation regimes?
04:39 Is gold always a good hedge against inflation?
06:30 What happens to the US dollar during high inflation?
07:35 How do bonds perform during high inflation?
08:45 How do different US Stock sectors perform during inflation?

***
Explore trading and start investing with Capital.com.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81.40% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

This video is for general information only and is not intended to provide trading or investment advice or any personal recommendations.  The information in this video is indicative, and may become out of date at any given time.

Capital.com shall not be responsible for any loss that you incur, either directly or indirectly, arising from any investment based on any information in this video.  Any information relating to past performance of an investment does not necessarily guarantee future performance.

Please remember spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage,  You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. Invest only what you can afford to lose.  These products may not be suitable for all clients, we therefore recommend that you seek independent advice and ensure you fully understand the risk involved before trading.  You do not own, or have any interest in the underlying assets.

Professional clients can incur losses that exceed their deposits when spread betting and trading CFDs….(read more)

LEARN ABOUT: Investing During Inflation

REVEALED: Best Investment During Inflation

HOW TO INVEST IN GOLD: Gold IRA Investing

HOW TO INVEST IN SILVER: Silver IRA Investing

High Inflation: How Markets React

Inflation is an important economic indicator that measures the rate at which prices for goods and services rise over time. When inflation is high, it can have significant effects on various aspects of the economy, including the stock market, bond market, and foreign exchange market. Understanding how markets react to high inflation is crucial for investors, policymakers, and individuals.

One of the first market reactions to high inflation is a decrease in the value of stocks. This happens because high inflation erodes the purchasing power of consumers, reducing their disposable income. As a result, individuals may cut back on their spending, which affects businesses’ profitability and, in turn, impacts stock prices. Additionally, rising inflation can lead to higher interest rates, making borrowing more expensive for companies. This increased cost of borrowing can decrease corporate earnings and negatively impact stock valuations.

On the other hand, high inflation can benefit certain sectors and assets. Historically, sectors that perform well during inflationary periods include energy, commodities, and real estate. These industries often see an increase in prices, leading to higher revenues and profitability. Investors seeking to protect their portfolios from decreasing stock values caused by high inflation may consider allocating their investments towards these sectors.

The bond market is also a key player in reacting to high inflation. Bond prices tend to move inversely to interest rates, meaning that when inflation is high, interest rates are raised by central banks to curb inflationary pressures. As a result, existing bonds with fixed interest rates become less attractive compared to new bonds issued at higher rates. Consequently, the prices of existing bonds decrease, leading to higher yields. However, new bonds issued at higher interest rates offer investors a way to protect themselves against inflation while earning higher returns.

Another important market that reacts to high inflation is the foreign exchange market. When inflation increases in one country relative to others, it reduces the purchasing power of that country’s currency. This depreciation can be reflected in the foreign exchange market, where the value of one currency relative to another fluctuates. In general, countries with higher inflation rates will experience a depreciation of their currency value, affecting trade balances and export competitiveness.

In response to high inflation, central banks and policymakers often implement monetary tightening policies. Through tools like increasing interest rates, reducing money supply, or tightening lending policies, central banks attempt to control inflationary pressures. These measures aim to stabilize the economy and restore confidence in the markets.

In conclusion, high inflation has a significant impact on various markets, including stocks, bonds, foreign exchange, and sectors such as energy and real estate. Stock prices may decrease due to reduced consumer purchasing power, while certain sectors tend to benefit from rising inflation. Bond prices tend to decline as interest rates rise, and currencies may depreciate in the foreign exchange market. Understanding how markets react to high inflation is critical for investors and policymakers in managing their portfolios and formulating economic policies.