Inflation is a matter of concern not only in the USA, but in many other European and Asian countries. Inflation is defined as mechanism leading to changes in population’s income, prices and resources. Speaking about inflation, there are many definitions which lead to different and even opposing results. Thus, it is suggested that inflation is artificial and suggests only subjective judgment. It goes without saying that high inflation rates prevent economic growth and cause population changes such as age structure and population size. Sharp increases in inflation rates cause high unemployment rates and lead to high resource prices.
It is apparent that inflation negatively influences security market. Actually, stock and bonds are also affected by fluctuations in inflation rates. Inflation leads to slow down of economic development, prevents growth of resource and energy stocks meaning that the prices are swiftly increasing. Commodity inflation is known to affect returns in emerging markets. Financiers say that no stock is immune from inflation fluctuation and, therefore, it is necessary to thoroughly examine when it is the best time to buy or to sell securities.
What is more important to note is that many companies are afraid of making transactions, because US Federal Reserve fights inflation by raising dollar interest rates. The article “Inflation and America’s Economy” by Dan Denning discuses the impact of inflation on security market as well as on energy and resources prices. The findings presented in the article contribute the evidence that inflation affects all spheres of economic and financial performance of the country. Denning, the author of the article, claims that the methods of fighting inflation are not always appropriate and may lead to sharper increase in interest rates and prices.
The author is very persuasive as he uses logical arguments and data to persuade readers that inflation rates fluctuation is a serious problem that should be stabilized and resolved. The author states that inflation strongly influences financial performance of the country, especially bonds and stocks prices. The prices on gold and oil have increased as well. The author is wondering whether high resource prices are able to slow down the production levels and thus to prevent further overall economic growth. He states that “these things are heating up so fast that both producers and consumers will have to cut back and retract”.
Obviously, high inflation forces market to re-arrange resource and to discount t the moment. The fact that “resource stocks are getting overheated” seems problematic and troublesome for the author. Special concern is paid to energy stocks and precious metals which are exposed the most to inflation fluctuations. Because of increased political risks the energy stock prices have significantly increased. Denning assumes that fall of the dollar may lead to complete fiasco. However, the government continues to print money in order to “prop up asset prices”. Moreover, the oil supply is lower than oil demand.
Denning asserts that “the smart speculative money right now is looking at out-of-the-money put options on gold stocks”. Inflation fluctuations affect also gold prices. It is noted if the gold busted out, only new multi-decade would high the dollar. Corrections and government interruptions are needed to expect more from the gold resources. Price fluctuations on gold would lead to sell-off in bonds and stocks. Therefore, the author wonders whether gold should be afraid of high inflation or deflation rates. Denning claims f “global liquidity begins to tighten in earnest, it will be bad for all asset classes”.