Tags: inflation | deflation | stocks | cheap

Stock Market Can Prosper With Inflation or Deflation

By    |   Wednesday, 21 Jan 2015 08:37 AM

Falling commodity prices are leading to concerns about deflation. Lower prices worry some investors because they believe consumers will delay purchases in a deflationary environment so they can pay a lower price in the future. This is unlikely to happen.

Deflation already exists for many items. Computers and many consumer electronics items have historically gotten cheaper and more powerful over time. Most consumers buy when they need new devices rather than waiting for a cheaper price. Necessity drives a number of purchase decisions, and deflation has little impact on that.

Inflation is also found in the economy. Every year, the prices of many utilities and food items rise but consumers again adapt to this and buy what is necessary.

A focus on the level of inflation or deflation misses the reality that inflation and deflation exist side by side and this will almost certainly be the case in the future. What matters to investors is the expected trend in the overall level of prices. If they expect large price increases, consumers can adapt to that, and if they expect deflation, they can adapt to that.

In general terms, changes in consumer prices could affect stocks. Inflation could increase interest rates, which would make stocks less attractive. Deflation would lead to low interest rates and make stocks more attractive.

This change is likely to be small and not important. Demographics and economic growth are more important to stock markets than interest rates are. It is probably best to focus on those factors, which are bullish, than to worry about rising or falling consumer prices.

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MichaelCarr
Falling commodity prices are leading to concerns about deflation. Lower prices worry some investors because they believe consumers will delay purchases in a deflationary environment so they can pay a lower price in the future. This is unlikely to happen.
inflation, deflation, stocks, cheap
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2015-37-21
Wednesday, 21 Jan 2015 08:37 AM
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