Inflation


Simply put, inflation is a general rise in consumer prices over a period of time. The Consumer Price Index is used as the main indicator of the rate of inflation in both Canada and the United States.

To determine the rate of inflation in Canada, Statistics Canada measures the price of a fixed basket of consumer goods against the price of those same goods the month before. By looking at the month-over-month and year-over-year changes in prices for these goods, it's possible to determine if inflation is occurring over a prolonged period of time. A one-time jump in the cost of certain goods does not necessarily mean that inflation is rising.

Rising inflation can have an impact on stock markets. Central banks like the Bank of Canada are usually eager to contain rising inflation. If inflation rises, they may take action to reduce the money supply (such as increasing interest rates).

Understanding how the stocks of certain companies react to inflation and consumer prices can help you make informed trading decisions. Inflation can increase the cost of doing business for publicly-listed companies. This can be a drag on earnings, which can cause the share prices of companies to fall. Some businesses are more sensitive to inflation than others – consumer retailers for example. If they must purchase goods to resell at higher prices, consumers may pull back on their spending. On the other hand, higher consumer prices sometimes mean higher prices for commodities. This can benefit companies that produce raw materials.