Posted in Finance, Accounting and Economics Terms, Total Reads: 217
Definition: Inflation Trade
Inflation trade is a way of generating profits during inflation i.e. increase in prices by investing in commodities. For this, investors invest their money and trade in commodities and natural resources like, Gold, Silver and Oil etc, because their value rises as the inflation in an economy increases.
Inflation means general increase in price levels of goods and services. Usually higher inflation is harmful for the economic growth and stability of a country. However for Inflation trade higher the inflation, more profits for the investors. This is because Inflation trading is a method of earning profits from an increase in general price levels. Inflation and interest rates are interrelated to each other. This can be given by Fischer’s Equation.
Nominal Interest Rate = Real Interest Rate + Inflation
When the interest rate rises, investors tend to invest more in banks and commodities rather than stocks, due to which there is also an increase in inflation, which in turn increases the possibility of Inflation Trade.
If the inflation of a country is higher than people tend to speculate and try to earn more profits by investing in commodities rather than Stock and Bond Markets, which is ultimately detrimental for the economy in the longer run.