High Inflation- Bullish or Bearish?

Discussion in 'Economics' started by Rearden Metal, Sep 2, 2006.

High Inflation (CPI): Which way does it move the S&P index?

  1. High inflation pushes the market up.

    12 vote(s)
  2. High inflation pulls the market down.

    14 vote(s)
  3. I have no idea.

    6 vote(s)
  1. Here... Watch this:

    I bet you'll see large groups of traders voting for <b>both</b> opposite answers!
  2. Low inflation = good for equities
    high inflation = bad for equities
    hyperinflation = great for equities as the equities become a hedge against the devaluing currency, but tend to end badly.

    (I define high inflation as inflation between 5-25%)
  3. so far cpi/ppi numbers when inflated have scared the mkt to hell. in oct infla suddently picked up and we saw what happened, same for the may decline, unexpected high numbers sent the mkt down to valhalla. if infla is caused by growth [strong gdp, labor mkt] tho in the long run it may be interpreted as a bull item...if caused by wages/oil and crap; no good.
  4. Bearish for US equities.

    Inflation outpace wages. Consumption decrease.
  5. mahras2


    Simply having inflation means nothing. For example at the moment having a low inflation outlook is great for equities as the market believes the Fed will cease raising rates. However, this can and does change based upon existing market participants.

    Its the same thing in terms of growth of the economy. While it is theoretically bullish for equities if growth is high in the economy, it might actually have a contradictory reaction. This is because at the moment sluggish growth would be perceived to show that the Fed may stop raising rates.

    Markets are not simple processes where a single indicator can be applied universally. The meaning of the indicator shifts based upon market perception.
  6. Excellent commentary....

    The fed uses inflation/deflation with respect to its capabilities as tools to hopefully smooth the US economic scenario as best it can be in accordance with their perception...

    The vaporization of over $7 trillion in 2000 required the fed to implement an especially easy monetary policy...which actually worked better than doing nothing...better than just letting the losses immediately pervade the overall economy....

    The issue now is that energy costs are causing some inflationary affects that are not wanted by the fed...but they always have to bet...and take what they feel is an optimal action amongst the choices that they have...

    Now they face losses in real estate or losses in the dollar...
    What they will try to do is to somehow effect a strategy that will keep the dollar in check while minimizing real estate losses...

    If there are not so severe real estate losses and not so severe dollar losses then they would have done a stellar job with the tools that they have...

    The fact is they will cause either deflationary or inflationary effects for short to intermediate time frames ....as if they were steering a large ship trying to avoid hitting glacial ice in the Antarctic...

    Thus the answer is either one can be good or bad at times....because it is the increasing and decreasing of corporate sales that needs to be as optimal as possible...and optimal is not always positive...
  7. Mahras hit it on the head, what seems to be more important for the markets is not inflation, but whether that inflation will result in interest rate changes.

    Also goes to show how the central banks are long term while the markets short term.
  8. Good god man, are you suggesting fiscal policy is a load of bollocks, and not to be trusted by ANYONE??!?!!?

    That's just OUTRAGEOUS.
    Oh ye, of little faith...........
  9. Hey 1920s, 50s, and 80s give examples of when strong economic performance caused stock prices to climb higher. During the reagan campaign, stocks ripped up in response to economic growth and job creation. But if inflation is problem caused by growth, then traders questoin the good job reports. This is becasue they think lot of the economic growth was due to easy credit and reflects an inflationary boom. Higher inflation and we have expanding money supply. With inflation in place, analysts believe the economic growth is sustainable and therefore the stock prices will fall. Or if economic growth falls, they think the Fed will ease in the future, and stocks rally. Stocks are always looking to the future :)
  10. "A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services."


    Be careful not to confuse cause and effect
    #10     Sep 6, 2006