WHAT IS INFLATION AND WHY IS IT IMPORTANT IN THE TRADING MARKET?

The exchange market is considered the largest financial market worldwide, affected by various economic fluctuations and conditions, such as inflation and deflation.

  1. Inflation is an index showing the rate of increase in goods and services prices in the economy. With an increase in price, a currency can buy less than it used to, and its purchasing power decreases.
  2. It should be noted that inflation can be divided into three categories (demand-pull inflation, cost-push inflation, and aggregate inflation). Two of the most popular indicators of inflation are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).
  3. Demand-driven inflation occurs when demand for goods exceeds a country's production capacity. In addition, this can happen when the money supply increases or devalues ​​a country's currency. Cost-push inflation occurs when there is an increase in production costs, including labor costs.

Integrated inflation, on the other hand, is based on expectations and the so-called wage-price spiral. As prices go up, people expect more wages; when wages rise, so do costs.


Note that cash holders will be negatively affected by inflation; while those with assets, such as stock commodities, could benefit from inflation. Therefore, the national authority or central bank must keep inflation within reasonable limits.

INFLATION AND TRADING MARKET

Due to the effect of inflation on the currency of one country, the exchange rates of other currencies also change. Note that this effect is usually negative. Inflation is also related to interest rates affecting exchange rates; Experts say that low-interest rates rarely attract foreign investment.

If there is no demand for currency then the ability to buy and sell this particular currency will below. Since the perceived value of any fiat currency is the most important, a country with high inflation may still have a more desirable currency in the world of trading. However, inflation rates are not always comparable across countries.

Inflation not only affects foreign investment and trading, but the political stability of a country is also an important factor in the market, as well as its economic growth and debt level.

WHAT IS DEFLATION AND WHY IS IT IMPORTANT IN THE TRADING MARKET?

Deflation is another economic problem that can affect the market world. Deflation is defined as either negative inflation or an inflation rate below 0%. Deflation leads to devaluation and an increase in the monetary value of a country. Deflation can be caused by a country's money and credit supply declines productivity growth or tight monetary policy. Also, deflation often occurs after periods of artificial currency expansion.

Interestingly, some of the most important deflation crises in the world occurred in the 30s in America, the 90s in Japan, and during the Great Depression in America. Today's technological advancement also affects the world economy, productivity, costs, and demand.

In fact, any change in the global economy affects investments and transactions. We should be aware that while deflation is beneficial for consumers, it can also have a negative impact on the financial sector. One example many economists give is that the borrower must pay back money that is more valuable than what they borrowed. At the same time, deflation can benefit companies with high cash reserves and low debt.

DEFLATION AND MARKET TRANSACTIONS

As stated above, deflation has a significant impact on a country's economy. I will take an example of the effect of deflator for you to easily imagine!

In the market world, central banks play an important role. For example, if deflation is due to low demand and poor profits for businesses, a country's currency may depreciate and foreign investors may no longer favor it.

In contrast to deflation (cutting inflation), inflation (accelerating inflation) can also occur. Here, we should note that inflation is defined as the act of stimulating a country by increasing money supply, lowering interest rates, and cutting taxes, especially after a period of financial recession.

That's why, without a doubt, deflation is a driving force in Forex. What's interesting is that when trading USD / JPY and USD / EUR - two popular currency pairs - deflation fears can attract investments in the dollar.

HOW TO TRACK INFLATION AND DEFLATION IN MARKET


Inflation and deflation are two important phenomena that can affect foreign exchange trading and other investment efforts. Tracking global news and data notifications is essential to help you understand the impact of inflation/deflation on your trading strategy/goals. You should:

  • Check out forex trading websites and by different central banks. Don't forget that central banks can control money directly!
  • Remember that it's not just the inflation rate that matters, but the market news and pre-release expectations too!
  • Don't forget that deflation and inflation also play an important role in the trading market!
  • Consider various factors that can affect the trading market, such as politics, global trade, and social issues!

HOW TO TRADE MARKET DURING INFLATION OR DEFLATION

That is:
  • Invest enough time to gain knowledge of the trading market and participate in various online seminars and forums.
  • Don't hesitate to connect with other market traders and learn from the best in the industry.
  • Whether you decide to trade full-time or part-time, get in the habit of trading and maintain a healthy lifestyle.
  • Depending on your goals, explore different trading options and strategies. Fear has no place in the trading market!
  • Gradually, set up a consistent trading strategy as consistency is the key to market success.
  • Keep an eye on financial indicators, social issues and news announcements differently as there are many factors that affect the world economy say them and trading Forex in particular.
  • Understand the importance of trading psychology and learn to control your emotions. Never compromise with greed or revenge!
  • Accept that the forex market is constantly changing, so losing is part of the game. After all, winning and losing are two sides of the same coin, right?