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.

INFLATION

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

  1. Money Supply
  2. National Debt
  3. DemandPull effect
  4. Cost-Push Effect
  5. Exchange Rates

Countries with the Highest Inflation Rates in the World, 2020

RankCountryInflation Rate (Percent)Update
1Venezuela282972.8April 19, 2019
2Zimbabwe175.66June 19, 2019
3South Sudan56.1March 19, 2019
4North Korea55July 13, 2019
5Argentina54.4July 19, 2019
6Sudan52.3July 19, 2019
7Iran48July 19, 2019
8Liberia23.3April 19, 2019
9Haiti18.6June 19, 2019
10Sierra Leone17.46March 19, 2019
11Angola17.24July 19, 2019
12Ethiopia15.5July 19, 2019
13Turkey15.01August 19, 2019
14Uzbekistan14.3December 18, 2019
15Nigeria11.08July 19, 2019
16Islamic Republic of Pakistan10.3July 19, 2019
17Guinea9.9June 19, 2019
18Myanmar9.51June 19, 2019
19Yemen9.49November 14, 2019
20Ghana9.4July 19, 2019

DEFLATION

Causes of Deflation

  1. Fall in Money Supply
  2. Lower Production Cost
  3. Technological Advances
  4. Increase in unemployment
  5. Increase in the real value of Debt
  6. 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.

Source:
https://www.imf.org/external/datamapper/PCPIPCH@WEO/WEOWORLD/VEN

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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