Inflation and Deflation – Explained and How it can affect your Trading Strategy?
What is Inflation?
Inflation is the rate at which the prices for goods and services increase. Inflation often affects the buying capacity of consumers. Most Central banks try to limit inflation in order to keep their respective economies functioning efficiently.
What is Deflation?
Deflation is generally the decline in the prices for goods and services that occur when the rate of inflation falls below 0%. Deflation will take place naturally, if and when the money supply of an economy is limited.
The statistic below shows the global inflation rate compared to the previous year from 2014 to 2024*. In 2019, the inflation rate worldwide amounted to approximately 3.41 percent compared to the previous year.
Causes of Inflation
- Money Supply
- National Debt
- DemandPull effect
- Cost-Push Effect
- Exchange Rates
Countries with the Highest Inflation Rates in the World, 2020
|Rank||Country||Inflation Rate (Percent)||Update|
|1||Venezuela||282972.8||April 19, 2019|
|2||Zimbabwe||175.66||June 19, 2019|
|3||South Sudan||56.1||March 19, 2019|
|4||North Korea||55||July 13, 2019|
|5||Argentina||54.4||July 19, 2019|
|6||Sudan||52.3||July 19, 2019|
|7||Iran||48||July 19, 2019|
|8||Liberia||23.3||April 19, 2019|
|9||Haiti||18.6||June 19, 2019|
|10||Sierra Leone||17.46||March 19, 2019|
|11||Angola||17.24||July 19, 2019|
|12||Ethiopia||15.5||July 19, 2019|
|13||Turkey||15.01||August 19, 2019|
|14||Uzbekistan||14.3||December 18, 2019|
|15||Nigeria||11.08||July 19, 2019|
|16||Islamic Republic of Pakistan||10.3||July 19, 2019|
|17||Guinea||9.9||June 19, 2019|
|18||Myanmar||9.51||June 19, 2019|
|19||Yemen||9.49||November 14, 2019|
|20||Ghana||9.4||July 19, 2019|
Causes of Deflation
- Fall in Money Supply
- Lower Production Cost
- Technological Advances
- Increase in unemployment
- Increase in the real value of Debt
- Negative events in the economy, such as recession
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Deflation is distinct from disinflation, a slow-down in the inflation rate, i.e. when inflation declines to a lower rate but is still positive.
How to trade during Inflation and Deflation?
There are pros and cons to every type of investment hedge, just as there are pros and cons with every type of investment. Also, there are positive and negative features to the various assets described above.
The primary benefit of investing during inflation, of course, is to preserve your portfolio’s buying power. The second reason is that you want to keep your nest egg growing. It can also lead you to diversify, which is always worth considering. Spreading the risk across a variety of holdings is a time-honored method of portfolio construction that is as applicable to inflation-fighting strategies as it is to asset-growth strategies.
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