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Upside and downside risks to inflation due to activity in the financial markets? watch

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    Just want to see people's opinions on how what's happening in financial markets will affect inflation. For example the crash in value of sterling, rising gilt yields, and any activity in the stock exchange.
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    (Original post by izofficiallyme)
    Just want to see people's opinions on how what's happening in financial markets will affect inflation. For example the crash in value of sterling, rising gilt yields, and any activity in the stock exchange.
    The devaluation of Sterling makes our exports more price competitive and our imports more expensive. What sort of goods do we import? How easy would it be to substitute the homemade goods for domestic goods? If they're hard to replace, you'll likely see higher inflation.

    With Gilt yields, it's important to note that their demand is affected by inflation expectations, not the other way around. If they pay a fixed amount, higher inflation expectations tend to lead to lower prices (remember, prices move inversely to yield) because the income you get now buys less in real terms. So if gilt yields are rising, it may partly reflect investors expecting inflation to be higher (but remember that inflation risk is not the only risk when investors buy bonds - higher yields may reflect increasing risk in other areas).

    Likewise, the stock market doesn't really have an effect on inflation (and again, it's usually the other way around). There's no single answer here as you have a multitude of reasons for why share prices are what they are. In theory, company revenues and profit would be nominally higher if they're increasing the price of their products to compensate, and hence share prices increase. On the other hand, if inflation significantly increases economic uncertainty, people won't be as confident to buy stuff which hurts earnings.

    Hope that helps!
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    Apologies for the late reply but thank you so much for your explanation! I'm starting to understand the role of financial markets in predicting economic outlook now
 
 
 
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