Partner code
vnd
for assistance

Inflation rate – Meaning and impact on the market

Inflation rate is an important economic indicator, affecting the value of currencies, people’s living standards, and the performance of the forex market. In this article, Learn Forex Trading will explain to you what inflation rate is, its meaning, and common types of inflation. How to calculate inflation, causes and measures to control inflation.

What is inflation rate and what do traders need to know

Inflation is an important concept in the financial markets that every trader needs to understand.

What is inflation rate?

inflationary rate is the degree to which the price of a basket of consumer goods and services increases over a certain period of time, usually a year. Inflation represents the loss of value of money. When a single currency can buy fewer goods and services than before. Inflation is often measured using the consumer price index (CPI) or producer price index (PPI).

Meaning of inflation index

The inflation index is one of the factors that determine the monetary policy of central banks. Monetary policy affects interest rates, money supply, and money demand. Interest rates, money supply, and currency demand affect the value of currencies in the forex market.

If inflation rate is high, the central bank can raise interest rates to absorb the cash. At the same time, reducing the money supply and reducing the demand for money. This will increase the value of the currency and reduce the price of goods and services.

However, inflation does not always have a negative effect on the economy. A stable and predictable level of inflation, usually around 2-3% a year. This ratio can promote economic growth, encourage investment and consumption, and create jobs and income.

>>>See more: What is inflation that has a strong impact on Forex?

Common types of inflation

There are different types of inflation, depending on its cause and extent. Here are some of the most common types of inflation:

Normal inflation: A type of inflation that is stable and predictable. Usually due to economic growth and consumer demand. Normal levels of inflation are usually within the central bank’s target range. Usually 2-3% a year.
Slow inflation: The level of slow inflation is often below the central bank’s target level. Fluctuates between 0-1% per year.
High inflation: High levels of inflation often exceed the central bank’s target level. Usually at a rate of 5-10% a year or more.
Hyperinflation: Hyperinflation is often hundreds or thousands of percent a year, which can make currency worthless.

How to calculate inflation

To calculate the inflation percentage, we need the consumer price index (CPI). CPI is a price indicator of a basket of consumer goods and services that represents people’s living standards.

To calculate inflation rate, we need to use the following formula:

Current period inflation rate = (Current CPI value / Base period CPI value) x 100

For example: Inflation in 2022 compared to 2021 = (CPI value in 2022 / CPI value in 2021) x 100
Suppose the CPI in 2022 and 2021 are 98 and 105 respectively. Then, the inflation rate in 2022 compared to 2021 is:

(105 / 98) x 100 = 107,14%.

Causes of increasing inflation rate

The inflation rate can increase due to many different reasons. Depending on the supply and demand of currencies, goods, and services. Below are some common causes of rising inflation.

Demand-pull inflation rate

Demand-pull inflation is a type of inflation that occurs when consumer demand exceeds the economy’s supply capacity. As consumer demand increases, so do the prices of goods and services, causing currencies to lose value. Demand-pull inflation often occurs during periods of rapid economic growth. When income, employment, and investment all increase.

Currency inflation

Monetary inflation is a type of inflation that occurs when the money supply increases faster than economic growth. When the money supply increases, the value of currency decreases, causing the prices of goods and services to increase. Monetary inflation often occurs when central banks inject too much money into the economy. Thereby stimulating economic activity or paying off public debt.

Inflation rate increases due to cost-push

The inflation rate increases due to cost-push is the type of inflation that occurs when production costs increase. Thereby, causing the prices of goods and services to increase. Production costs can increase due to many factors, such as increasing raw material prices, increasing labor wages, increasing taxes or increasing import prices.

Inflation is caused by changes in demand

Inflation due to changing demand is the type of inflation that occurs when there is a change in the structure of consumer demand. When people’s spending needs change. The prices of some goods or services may increase faster than the prices of others. That then causes inflation to increase.

Inflation due to changes in demand often occurs when there are unexpected events or new trends in society. These include special events, natural disasters, epidemics, wars,…

Inflation is caused by changes in demand

How to control the inflation rate

The inflation rate is an important factor affecting the stability and development of the economy. Below are some of the most common ways to control inflation.

Increase production to control inflation

One of the most effective ways to control inflation is to increase production to meet consumer demand. As production increases, prices of goods and services will decrease or stabilize. Thereby making the currency retain its value. To increase production, governments and central banks can apply the following measures:

Increase investment in infrastructure, technology, education, and training. Thereby aiming to improve labor productivity and product quality.
Promote competition, innovation, and cooperation in the economy. With the goal of creating many new, diverse, and high-quality products and services.
Expand domestic market and foreign trade. Thereby, increasing the supply and demand of goods and services, as well as taking advantage of comparative advantages and economic integration.

Reduce the rate of cash in circulation

Another way to control inflation is to reduce the proportion of cash circulating in the economy. When cash in circulation decreases, the value of currency increases. Thereby, causing the prices of goods and services to decrease or stabilize. To reduce the ratio of cash in circulation, central banks can apply the following measures:

Increase base interest rate. Thereby absorbing cash, encouraging savings, and reducing debt.
Sell government bonds. To recover cash, reduce money supply, and increase currency demand.
Increase the required reserve ratio. With the purpose of reducing the lending capacity of commercial banks, reducing money supply, and increasing currency demand.

>>>See more: Registering broker XTB account on the phone

The effects of inflation rates on the forex market

Inflation rate is a factor that affects the value of the currency in the forex market. If the level is high, it will affect and reduce the value of the currency. While low rates will increase the value of the currency. Therefore, traders need to monitor and analyze the inflation rates of the countries whose currencies they trade. Thereby, it is possible to make reasonable decisions about what is financial investment .

One of the ways to analyze inflation is to compare the inflation of two countries whose currency pairs are traded. If the inflation of the country with the base currency is higher than the inflation of the country with the bond currency. Thus the value of the base currency will decrease relative to the bond currency.

However, inflation is not the only factor that affects the value of currency. Therefore, traders need to consider these factors as a whole. Thereby, being able to predict currency trends and come up with effective trading strategies.

So in the above article, Learn Forex Trading has informed you about inflation rate. This is an important economic indicator, affecting the value of currencies and the activity of the forex market. Traders need to monitor and analyze the inflation percentages of countries. Then to be able to make reasonable trading decisions.