The stock exchange enables you to speculate on the value of some of the world’s most successful companies. The stock market is extremely volatile, meaning the value of an asset is susceptible to change and can fluctuate at any time. Since a company’s earnings and the price of their shares are directly linked, a change in consumer spending has the power to influence the value of a stock. At the time of writing, major economies such as the United Kingdom’s are experiencing high levels of inflation, meaning living costs have risen significantly. This rise in inflation was prompted by a rise in consumer spending following the coronavirus pandemic, with economies returning to normality after years of successive lockdowns.
The stock market is influenced by external factors and many of these are economic. You can learn more about stock trading and open a position on an online trading platform, which will provide you with the information and tools that you will need to maximise the potential of your trades. In this article we will explore how rising living costs have affected the stock market, to help you to understand how you can best navigate periods of economic uncertainty. Keep reading to find out more.
What is inflation?
Inflation is an overall increase in prices over time and is displayed as a percentage. The UK’s inflation levels are calculated by the Office for National Statistics who combine the cost of an array of goods and services that people regularly purchased to gage an average price level. This is known as a Consumer Price Index (CPI) and can be compared to figures from the previous year to figure out the rate of inflation. In order to maintain a stable, healthy economy, the UK will aim to maintain an inflation level of 2%, however, as of December 2021, the nation recorded an increased level of 5.4%.
This percentage denotes how extensively prices are rising and provides an idea of the UK’s current economic climate. Food, fuel and energy prices have all surged and living costs are currently extremely high in the UK.
Another factor that has caused the cost of living to rise is increased interest rates that have been put in place in order to curb inflation levels. Increased inflation rates make borrowing money from the bank more expensive. This means that the consumer will have to pay more on their mortgages, or to take out a loan and therefore, will typically be prompted to save. This in turn will help inflation levels to drop, because the consumer will have less excess capital to spend on non-essential goods, meaning less of their money will be put back into the economy.
How have increased living costs affected stocks?
The UK is not the only country to be experiencing a high cost of living, since the US is also recording extremely high levels of inflation at the time of writing. The health of the US economy can have a significant impact upon the outlook of the stock market and recently, the Federal Reserve announced that they plan to increase the Federal Funds Rate in March. In response to this announcement, the Financial Times Stock Exchange (FTSE) 100’s share prices fell by 0.5% and many Wall Street stocks also experienced a decline in value.
When inflation occurs, living costs rise meaning consumers are able to spend less of their capital on goods and services. This will cause profits and revenues to decline, having an adverse effect on the value of their stocks.
As a stock trader, you’ll need to keep up to date with news releases and key economic dates — particularly changes to monetary policy. Inflation, unemployment rates and Gross Domestic Product (GDP), for example, are all key economic indicators that can affect the stock market. To help you to best navigate periods of economic uncertainty, you can employ an economic calendar which will keep you informed of the key data releases and events in the year that could impact the stock market.