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Inflation and Growing Recessions Fears Impact on Investments

By Louis H-P on August 19, 2022

Reading Time: 3 minutes

As of June 2022, the consumer price index in the United States rose by 9.1% and in the United Kingdom by 9.4% over 12 months. This change in the basket of goods characterizes what is known as inflation. The preferable situation is where the price level remains constant or relatively stable. Ideally a change of only 2%.

In recent news, it has been reported that the US economy shrank at a rate of 0.9% between April and June. This has sparked even greater concerns among economists that a recession is very close. With talks of inflation continuing this volatile path and a looming global recession, what does this mean for your investments?

Key Takeaways

Why is inflation so high?

What confluence of events has made things worst

How you can still make money


Understanding Inflation in 2022

Several cumulative factors explain the current high inflation. It started with the supply of goods and services falling short of demand following the last few years of confinements.

Central banks had hoped that this price increase would be short-lived. They expect the level of production and the circulation of goods would return to normal. However, this is not the case.

China, the leading producer of manufactured goods worldwide, is proving slow in opening its borders again. This is due to its policy of applying strict population restrictions.

Two major players on the sidelines…

These two countries are major players in several raw materials: oil, gas, and cereals, such as wheat. Western countries have since boycotted Russian products. The export of Ukrainian agricultural production is limited.

Inflation is also increasingly affected by the outbreak of Russia’s war with Ukraine. The unprecedented agricultural disasters in several countries intensified this raw material crisis. This includes Spain, France, and the United States.

It seems unlikely that there will be any solution to compensate for the absence of production from Ukraine. This is thanks to drought and crop damage caused by extreme weather. The accumulation of all these elements is causing price increases and recession fears.

Inflation increases has caused volatility in markets
Source: Pixabay

Making Investments in the Face of Inflation

A more in-depth inflationary analysis is required to understand the various issues. As rising prices affect not all sectors and countries in the same way. This creates trading opportunities, albeit with a higher risk.

Traders need to be more vigilant in the face of inflation and how it influences their decisions. Inflation will continue to impact all markets, including the FTSE 100. Here are just some ways that the rising inflation affects investments.

Interest Rate Increases

The first response by policymakers and central banks to rising inflation is to increase interest rates in an effort to slow down the market. As interest jumps, this mean higher credit and mortgage repayments rates. Households are under pressure.

But for a FTSE 100 riser such as a major banking institution like Barclays, for example, it is an opportunity for earnings. This is after a period of historically low-interest rates. As you are probably aware, the FTSE 100 is an index of 100 companies.

So it is important to remember that when investing in the entire indices, the value will match the combined market cap of all of those companies. This value fluctuates daily. As the economy has changed, several financial institutions like Barclays have fallen in and out of the FTSE 100 index over the past decade.

To better understand index shares, it is worth looking at some of the top FTSE performers. In particular what has influenced their success, including interest rates and inflation.

Inflation has been caused by an increase in the oil price
Source: Pixabay

Increased Prices

A significant characteristic of inflation that is negatively impacting big names on the FTSE 100 is inevitable price increases. This affects everything, including commodities and supplies. Brands and big businesses are already starting to pass on the price increases to customers, slowing down growth.

Conclusion

The increase in the price of a “basket of goods” most obviously impacts households. It also means that big FTSE 100 companies such as Tesco are also affected. Absorbing price hikes, which in turn negatively affects the bottom line, meaning share prices are also hit.

Carefully analyzing how each sector is necessary. In particular both negatively and, in some instances positively. It is also vital when looking at potential FTSE 100 investments, with a potential for gains despite rising inflation risk.

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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