The US has recently seen a surge in the value of inflation, which has widespread repercussions as seen from the response from forex trading and other circles. There are different perspectives regarding the impacts of US inflation, as some take it as a positive driving force while others believe that it leads to a struggling economy.
The impacts of inflation are witnessed in diverse areas, including consumer purchasing power, cash value, borrowing costs, employment rate, etc. All these have their impacts on a country’s economy and its potential to engage in foreign exchange. Thus, these determine the future of forex trading for a country and stay sturdy in varying situations.
The current US inflation has widespread impacts on different areas, and one of these is forex trading which sees opportunities with the growing risks. As the new year sets in, there is an increase in a rally for the market, which predicts a tumultuous change for this year and the upcoming time. It is yet to be seen what will happen in the actual market.
In this article, we briefly discuss the impacts of inflation and what potential outcomes it might have for forex trading in the future.
Inflation and its Effects
Inflation is defined as the gradual increase in the price of services and goods with time. It carries different impacts for a country depending on its economic strength and the value of its growth. The main impact of inflation is that it affects purchasing power. Thus, the result impacts the whole economy as the currency cannot always cope with the growing problem.
The above-given chart from Investopedia shows the fluctuations in the inflation rate for years ranging from 1998 to 2020. Rise in the value of inflation shows that the spending from consumers increases which leads to a rise in investments. The trend for purchase increased because of the belief that if a product is not purchased today, it might be available at higher costs tomorrow.
If the rate for purchases increases, it is a good sign for capital owners because of the increased turnout to the market. Consequently, the value of stocks goes up, and the stock market continues to prosper. The impacts are not only limited to the national economy but also its global trading.
The impacts of inflation can be good for capital owners and businesses, but it leads to further inflation. As the result of continuing growth in prices, the customer faces problems as it might become unaffordable to purchase goods.
An example is the Weimar Republic which went through hyperinflation in the 1920s. Thus, the impact is on the consumer who cannot purchase goods anymore, and the currency fails.
For this reason, inflation needs to be kept in check to keep the economy healthy instead of driving it to a dead end. A good impact of inflation is an increase in the employment rate as the employers can hire workers using the same value while the costs have increased, which in turn benefits the employer.
The Current US Inflation and its Brief Overview
The data for recent years shows that the rate of inflation in the US is running high. The result of this is an increase in the cost of energy and food prices. If we compare the past year’s data to that of previous decades, a tremendous increase is seen over the past year.
Experts at Brookings believe that the current data carries the impact of the pandemic and might not have lasting impacts on the market, though they can’t be outweighed completely. The trend in the market might change, but its impacts will last with certain impacts.
If we look at the above-given chart, the CPI value increased during the late 60s till the start of the 80s. At the same time, there is a decrease in its value seen till 2009 when it reached the lowest. Further ahead, there is a rise in its value seen till 2021.
During the pandemic years, there has been an increase in the demand for a good while supply lagged, increasing prices while the inflation rate grew. If this continues, it is problematic for experts because it will take prices to an unbearable value for the consumer.
The CPI value for Oct 2020 – Oct 2021 has been 6.2%. The increase has been greater than the Federal Reserve target, which would have been 5.1% if there was no pandemic. There is about a 1.1% increase in its value which is comparable to the annual growth rate of inflation. The major change has been the increase in core goods which have seen a surge in their value.
There are hopes that the demand-supply chain will normalize as the pandemic recedes. Though there might be a change in the supply, the transition in job modes and other factors might affect the labor supply to the market. If this happens, it will affect the market, and forex trading can also be affected.
Risks Related to Inflation
Inflation has both positive and negative aspects for the market and the consumer. The major impact is that of the exchange rate between the two nations. It will determine the value of the currency, and as a result, it will be a determining factor amongst others. Experts believe that inflation has more of a negative impact than a positive one on the foreign exchange.
Inflation should be at a modern rate to ensure that the country benefits if it is working on foreign exchange with any other. If the inflation rate is very low, the results will be unfavorable, while the impacts are no different if it is very high. If the interest rates are balanced, it will help consumer spending, and the economic growth will continue. At the same time, any imbalance, either rising or falling, will have negative impacts.
Political stability and inflation determine the value of exchanges as a sudden fall in the value of a currency can affect investors, so it might be a continuous risk in a politically unstable country. An example is a decrease seen in the value of the Bolivar where even thieves refused to take it. Ultimately, it also affected the forex trading of the country as the capital owners were in continuous loss.
Therefore, the harm factor should be minimized related to inflation, or otherwise, it will affect the future of forex trading in a country.
How does Future Trading Help Negate Inflation?
Inflation and forex trading are directly related because of the impacts of inflation on the latter. CPI or inflation rate is the main factor kept in mind while reserve banks determine the interest rates. Interest rates impact the exchange rate in forex trading, which can either lead to its growth or recession.
If we compare the currencies of two countries working on foreign exchange, the one with a higher inflation rate loses the value while the one with a lower rate benefits the situation. So, one partner in the forex trading benefits while the other doesn’t get the desired value. Thus, those from the country with the high-interest rate will lose and resultantly prefer not to engage in forex trading.
The solution to this problem is future trading which is defined as an agreement to serve the trading needs using pre-agreed trade. The two traders agree about the price, time of delivery, and other factors about the trade.
This ensures that prices and inflation values are kept in check. It also helps regulatory authorities have a prior idea of what the rate of inflation can be in the future. As future contracts take place between traders, they settle problems like the unit of measurement, amount, currency, etc.
As a result, they keep inflation in check and even lower its value. It has benefits but also involves risks for traders because they might suffer losses if the market turns against them.
The Future Trading Outcomes of US Inflation
Though the inflation rates have been soaring since October 2021, it is yet to be seen how they will impact forex trading. Experts believe that the current rise is due to the pandemic. The inflation rate will also lower if the market stabilizes after the pandemic. If this happens, the result will be an increase in forex trading because of the growing benefits that the traders will have.
If this is not the case, there will be a decrease in trading value because no investor wants to lose their capital. So, the future of trading will be determined by the changes in the near future, which will impact the inflation value.
So, investors and traders will check the value of inflation in the country, which will determine if they continue their journey with forex trading. There are other factors as well, but inflation has a significant value in determining the forex future in the US.
The US has been going through a difficult phase regarding inflation since October 2021. It has affected different markets and is one of the inclusions in forex trading. The increased interest rates affect the traders, which might discourage them if it lasts for long. It is not yet clear if this trend will last longer, but the impacts might be negative for the mentioned domain if it continues like this.
The investors will check the market and decide accordingly, so the new changes will determine growth.