Shares/Stock Why Does Stock Market Falls With Rising Inflation

Mika

VIP Contributor
When inflation rises, the price of raw materials also increases. In order to control the rising inflation, the central bank increases the interest rate (this happens in every country, where there is a functional government). With the rise in the interest rate, the return of debt and fixed income instruments also increases. This makes the debt market attractive. Therefore, people start selling off their equity, so that they can invest their money in the debt market.

Since the central bank has increased the interest rate, the cost of borrowing is also high. Raw materials, on the other hand, are also priced high. Due to the high burrowing interest rate and high prices of raw materials, the profit margin for business decreases. This is reflected in the company’s quarterly results. When the profit goes down, negative sentiments will grow among investors. Selling in the equity market and negative sentiments result in a decrease in stock prices.
 

Jasmine

VIP Contributor
A lot of people believe that the stock market goes up or down based on the demand and supply rule. They believe that the stock price goes up when people start buying and stock price goes down then people start selling. Well, buying and selling activities of course affects the stock price, but there are a lot of other factors, such as economic situation in the country, monetary policy of the country, sales, profit margins, etc. Stock market and inflation are correlated. If you have been investing in the stock market, you might have noticed one common trend. When inflation rises, stock market falls. Do you know why this happens? When inflation rises, purchasing power parity decreases, which means the value of the money decreases, you cannot buy the same thing with the same amount of money. This will increase the production cost of industries (because the price of raw materials have increased) When production cost increases, the profit margin will go down.
 
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