What Global Inflationary Pressure Means For The Stock Market

In recent weeks, countries around the world have announced an increase in inflationary pressure in their economies. Prices rising is nothing new, however, there are some worries that traders on the stock market should take into account, especially if state action is to be taken.

Rising Interest Rates

This comes in the wake of Bank of England governor Andrew Bailey suggesting an increase in interest rates from 0.1% in order to curtail rising inflation rates. Making lending more expensive means that there is less disposable income within the economy, ultimately pulling prices down in order to reach an equilibrium.

However, this can be bad news for investors.

As there is less money available to spend, more casual investors such as retail investors or those that do so in their spare time may struggle to find the funds to invest as normal. This may even lead to a sell-off of assets, as companies protect their wealth in liquid form rather than risking shrinking stock prices.

Global Scale

Even worse is the fact that inflation is taking place across the global economy rather than being segmented into one market.

If, for example, Germany was facing inflation rates of around 4% with the rest of the world stable at 2%, the bulk of the global economy would be fine and the world of investment would keep continuity.

However, as many countries are dealing with this issue at once, a monetary policy such as inflation may be leveraged internationally. This means that investors all over the world may slow down, pulling stock prices downwards.

In terms of your investment, this means paying more attention to the movement of central banks.

For example, if it looks like there is an impending interest rate rise, divestment from companies in that country may be wise until their stock price dips, in which case you can get your stocks back with extra money as profit.

Sectors like banking may be especially vulnerable, as they are the most likely to interact with central banks when lending. By being attentive and avoiding higher interest rates where possible.