How Inflation Affects the Market

Now, let's break down how inflation happens. There are three main types: demand-pull, cost-push, and built-in inflation.

First up, we've got Demand-Pull inflation. Imagine your whole town just won the lottery. Suddenly, everyone's rushing to buy new cars, but there aren't enough to go around. What happens? Prices go up. It's simple supply and demand.

Next, there's Cost-Push inflation. Let's say you run a pizza shop. If the cost of cheese and flour suddenly doubles, you might have to raise your pizza prices just to stay in business. That's cost-push in action.

Lastly, we have Built-In inflation. This one's like a cycle. As living costs rise, workers ask for higher wages. Companies agree, but to cover these new costs, they raise their prices. And round and round we go.

So, what's behind our recent inflation spike? It's actually a mix of all three!

It all kicked off during the pandemic. The U.S. government rolled out stimulus packages, giving direct cash to citizens. This was to help those hit by the pandemic and get people spending again—classic demand-pull inflation.

Next, the Russia-Ukraine conflict, which started in 2022, disrupted supply chains, driving up global energy and food prices. Related sanctions also affected the supply of various raw materials.

Oil prices shot up to $130 per barrel, and prices for copper, aluminum, and grains soared, too. This led to cost-push inflation.

Lastly, as living costs rose, many workers went on strike to demand higher wages, including those at big companies like Boeing and Starbucks. If this turns into a wage-price spiral, we could be in for a long inflation ride.

So, we've got a perfect storm: demand-pull, cost-push, and the potential for built-in inflation all at once. No wonder the Fed's having a tough time cooling things down!

What does inflation mean for the markets?

Moderate inflation is seen as a sign of healthy economic growth and is generally positive for capital markets. But high inflation, like we've seen recently, can rock the boat.

Stocks: Rising costs and uncertain revenue growth can hurt business performance, potentially leading to falling stock prices.  

And if the Fed hikes rates to cool things down, borrowing gets pricier, which can put a damper on spending and investment.

According to the IMF, stock returns and inflation are negatively correlated.

Bonds: Bonds usually offer fixed interest returns. If inflation rises, the purchasing power of money drops, meaning your bonds lose value.

Plus, with rising rates, new bonds offer higher returns, making old ones less attractive, so their prices fall.

Commodities: Physical assets like commodities often hold steady or rise when inflation and currency depreciation occur. If it's a supply chain issue causing cost-push inflation, commodity prices can jump even higher.

In 2022, while U.S. stocks and bonds took a hit, commodities held their ground.

Want to keep an eye on all this? Moomoo's got you covered.

For example, you can easily check commodity performance on moomoo. Just hit "Markets," select "Overview," and scroll down to "Commodities."

For the commodities you're interested in, add them to your "Favorites" on the details page to keep track of their movements.

That's a wrap for this macro session. Next time, we're tackling CPI, PCE, and PPI. Trust me, after that, you'll be reading inflation data like a pro.

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Thanks for tuning in! See you next time!