Inflation And The Stock Market

Inflation and the stock market go hand and hand.

Generally speaking too much inflation is simply bad for the economy as a whole; therefore, bad for the stock market. This is because the higher inflation is the less consumers will get for their dollar.

Many economist are happy if inflation is no more than 3 to 4 percent. This is one of the reasons investing in stocks tends to be a good idea, because historically stocks have an average return of 11%. Therefore, stocks tend to beat inflation year after year. Although there is no guarantee this will always occur, and in fact in 1980 inflation went up to 18%.

There are 2 important indicators used to measure inflation:

1. Consumer Price Index (CPI) - measures changes in price for everyday things such as food and clothing. When this number rises it means inflation is rising.

2. Producer Price Index (PPI) - measures how inflation is rising or falling based on what it cost producers to produce goods based on the cost of commodities. When this number rises it will cost consumers more to purchase goods.

So to keep it simple the stock market likes to see low CPI and PPI numbers.