Inflation is an economic process caused by the existing imbalance between production and demand; causes a continuous rise in the prices of most products and services, and a loss of money value to be able to acquire or make use of them. In itself it does not have much to do with the evolution of the equity markets. But it does, on the other hand, through the policies that are developed based on this important economic variable. To the point that at certain times it can make the stock market rise or fall.
In principle, a low inflation helps listed companies perform better in equity markets. This fact is due to the implications it has on the hiring of workers, salary reviews and even on the financing they acquire to carry out their business lines. All this translates into a much more favorable environment for companies to grow. And therefore, in theory, it should be transferred to its valuation in the equity markets. But in a much more sibylline way than through other economic parameters.
While on the other hand, we cannot forget at this time that the international stock exchanges have had their best behavior in periods when inflation was contained or at least lower than normal. With revaluations that have reached very important levels in all international markets. This is an aspect that you should take into account from now on when you are going to open positions in any of the stock indices in the world. Beyond other considerations of a technical nature and perhaps also from the point of view of its fundamentals.
Higher CPI
On the other hand, a high CPI can create very relevant tensions in a country or economic space. To the point that one of the most affected markets are the monetary ones, with a cross with great volatility in the currencies. Especially those that refer to the US dollar and the euro. With what this means to design an economic policy by governments around the world. This in practice really means that higher CPI not good for the interests of small and medium investors. Stock markets usually do not perform well in this inflationary or high-price scenario
While on the other hand, we must also take into account that it can end up affecting the salary of workers. And in this sense, in the end it is transferred to the result of listed companies that may lose their valuation in the equity markets. Although not in such a visible way as through other important economic and monetary parameters. For example, the GDP, unemployment data and the business or state deficit. What catalysts of stock market evolution, as you have seen in recent years.
This is an aspect that you should take into account from now on when you are going to open positions in any of the stock indices in the world. Beyond other considerations of a technical nature and perhaps also from the point of view of its fundamentals.
How to act in these scenarios?
Of course, it is not very easy to operate in equities based on the IPC data. If not, on the contrary, it is very difficult to carry out this kind of action. Where they must be accompanied by other economic data of certain relevance so that you can make a decision on your investments, in one sense or another. Because in effect, inflation in the shortest term is certainly not listed on the stock market at least at the scale of small and medium investors. In this sense, it is very practical to carry out the investment strategy that if inflation goes down you can expose more money in stock trading. Whereas if it rises it can create more problems in the stock indices of the whole world.
Another aspect that is particularly important with regard to inflation is that it may be linked to other factors for which companies listed on the equity markets are listed. To the point that very quietly their prices may fluctuate one way or the other. Where it is very common that small and medium investors themselves do not realize this situation in the business landscape. This is something that is always present in the financial markets sector.
While on the other hand, inflation can be said that it is not so influential to develop an investment portfolio for the next few years. But for example, it is a factor that at the moment has had nothing to do with the breaking of the support of 9.000 points in the benchmark index of Spanish equities and that has led to all the alarms in the Ibex 35. To the point that it cannot be highlighted that in the coming months it could go to levels very close to 8.300 points.
The CPI at the moment
Rebound in the general CPI The annual rate of the general Consumer Price Index (CPI) in June is 0,4%, four tenths lower than that registered the previous month, according to the latest data provided by the National Institute of Statistics (INE). Where it is shown that the groups with the greatest influence on the decrease in the annual rate are: Transport, which presents an annual variation of 0,0%, almost two points lower than last month. This is due to the decrease in fuel and lubricant prices this month, compared to the increase registered in June 2018.
Another is housing, whose rate fell by more than one point, standing at –1,5%, due to the drops in electricity prices and liquid fuels, which increased in 2018. For its part, the group that stands out for its positive influence on the annual rate: Leisure and culture, which places its rate at –0,4%, eight tenths above the May, mainly as a result of the increase in the prices of tourist packages, higher than in 2018.
Underlying inflation
While on the other hand, the annual variation rate of core inflation (general index excluding non-processed food and energy products) increased two tenths, to 0,9%, which is five tenths above that of the CPI general. The annual rate of core inflation was not higher than the general CPI since January 2018. On the other hand, the groups with the greatest negative impact on the monthly rate of the CPI are: transport, whose variation of –1,4% has an impact of –0,222, due to the decrease in fuel prices .
Clothing and footwear, with a rate of –1,3%, which reflects the behavior of prices at the beginning of the spring and summer sales period. The impact of this group on the general CPI is –0,083. Housing, which places its variation at –0,6% and has an effect of –0,080, as a result of the drop in electricity prices and, to a lesser extent, gas.
Increase in leisure and food
For their part, the groups with the greatest positive impact on the general index are: Leisure and culture, with a rate of 1,7% and an impact of 0,140, explained almost entirely by the increase in the prices of tour packages. Food and non-alcoholic beverages, which presented a rate of 0,4% and an effect of 0,074, motivated by the increase in the prices of fruits and, to a lesser extent, meat. It is also worth noting, although in the opposite direction, the falls in the prices of fish and shellfish, legumes and vegetables and oils and fats.
The annual rate of the CPI decreased in all the autonomous communities in June compared to May. The greatest decreases occurred in Cantabria and Castilla y León, with drops of six tenths. For their part, the Canary Islands and the Basque Country are the Autonomous Communities whose annual rate registered the lowest decrease, two tenths compared to the previous month. While on the other hand, it is necessary to emphasize that the annual variation rate of the HICP stands at 0,6%, three tenths below that registered the previous month. While on the other hand, the monthly variation of the HICP is –0,1%.
Constant Price Indices
In the period analyzed by the National Institute of Statistics (INE) it is revealed that the annual variation rate of the CPI at Constant Taxes (CPI-IC) stands at 0,4%, the same as that registered by the CPI general. The monthly variation rate of the CPI-IC is –0,1%. For its part, the HICP at Constant Taxes (HICP-IC) presents an annual rate of 0,6%, the same as that of the HICP. While finally, the monthly variation rate of the HICP-IC is –0,1%, according to the data provided by the INE.