Here's Why Inflation is Bad for Stock Prices

After many years of historically low-interest rates following the 2008 financial crisis, it seems that surging inflation will force the Federal Reserve to increase its rates.

Rate rises have implications for businesses and households alike, so here is one thing to expect from the increases and the knock-on effects.

Stock Prices Decreasing

The higher interest rates are, the more expensive it is to borrow money. That isn’t just a problem for individuals but also businesses since they rely on borrowing to grow their operations. Considering we’ve already been through a tumultuous period and we’re entering another one, this could spell tough times.

Bad news for businesses means bad news for their shareholders. Higher interest rates could be one reason (among many more) why the stock market has declined since the start of 2022, and it may mean the trend is likely to continue – at a minimum we can expect some big swings in prices and volatility.

Then there’s the fact that higher borrowing costs make it more expensive for consumers to spend money, which affects the businesses selling to the consumer. Considering the prices of goods and services increase with inflation, people can now afford relatively less.

Plus, some individual investors may also get spooked by inflation and decide to sell their stock holdings, particularly finance-related stocks. That doesn't necessarily mean it's time to sell though — if you're brave, you could try to "buy the dip." 

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