Defined as a general increase in living expenses, inflation is quite vulnerable to change in the world financial scene. Recent world economic events including the COVID-19 outbreak, territorial disputes, and logistical disruptions have governments, central banks, and investors all little concerned about inflation. Legislators and traders both have to understand how inflation influences Forex, stocks, mutual funds, the commodities market, and gold among other markets. By means of comparison between inflation in Pakistan’s economy and those of other countries, one can develop important awareness of the reactions of both domestic and global markets.
Effect of inflation on markets for Forex Market:
Inflation impacts forex markets through fluctuations in the value of the currency of a country. Higher inflation countries may have their national currencies depreciated in comparison with others as buyers seek currencies with more stability decreases the value of purchasing power. For example, the value of the Pakistani rupee (PKR) usually weakens against stronger currencies like the U.S. dollar (USD), as inflationary in Pakistan climbs. On another hand, in economies with low inflation—like the US or Japan—their currency often rise in value increasing their appeal on global markets.
Trends in global inflation additionally force central banks to raise interest rates, consequently having an impact on the exchange rates. As proven by recent rate hikes the the U.S. Federal Reserve, monetary authorities could increase interest rates in order to reduce inflation when it rises. Higher interest rates bring in foreign capital, consequently rising demand for the currency of that particular country.
In Pakistan, a constant struggle with inflation has resulted in a declining value of the rupee. Higher inflation rates cause the PKR to often depreciates more quickly than in other markets, therefore stressing imports and raising the cost of debt with foreign currency value.
How Inflation Affects Stock Markets:
In stock market inflation can have both good and bad consequences. Rising inflation usually results in higher corporate expenses, which lowers profit margins—especially for enterprises unable to pass these expenses on to consumers. Stock prices suffer from this. Investors might sell off equities, especially in areas like consumer goods or utilities where input costs rise more quickly than output prices.
Even industries, meanwhile, including commodities, real estate, and even technology companies, can profit from inflation. Inflation-sensitive industries including energy and commodities have seen more volatility in the Pakistan Stock Exchange (PSX) during inflationary times. Globally, excessive inflation in nations like the United States has similarly impacted consumer basics and tech equities; market corrections expected in 2022.
Inflation and the Commodity Market:
Because items like metal, wheat, and oil immediately impact growing prices, the commodity market is especially vulnerable to inflation. As investors see real assets like commodities as a counter against inflation, demand for them usually rises when inflation rises. Rising production costs brought on by higher commodity prices help to create an ongoing inflationary cycle.
Rising inflation in Pakistan, for instance, has driven up prices for basic goods including wheat, rice, and oil, so taxing the economy and raising corporate expenses. Globally, inflation and supply chain interruptions caused by which crude oil and natural gas prices soared recently, therefore adding to the worldwide inflationary pressures.
Gold as an Anti-Inflation Hedge:
Long considered as a safe-haven asset and a good inflation hedge is gold. Investors swarm to gold as it often retains its value better than other investments as inflation rises. Usually rising during inflationary times, gold prices provide investors with a means to protect money in both Pakistan and abroad markets.
For example, the price of gold in rupee terms has reached record highs as Pakistan’s inflation has skyrocketed, therefore reflecting both local devaluation of the local currency and worldwide inflationary pressures. In reaction to worries of global inflation, economic slowdowns, and geopolitical concerns, gold has also surged as a store of wealth in worldwide markets.
Effect on Mutual Funds:
Inflation affects mutual funds as well, particularly those allocated to bonds or fixed-income securities. Rising inflation lowers the actual worth of bond returns since the income produced loses buying power. Investors in bond-heavy mutual funds could so see their earnings compromised by inflation.
In equity-oriented mutual funds, inflation affects the areas of investment the fund targets. While those invested in consumer basics may suffer in Pakistan, mutual funds exposed to the energy and commodities sectors may gain from growing prices. Globally, mutual funds exposed to inflation-resistant industries, such infrastructure or commodities, usually perform better in inflationary times.
Pakistani Economy VS Foreign Markets
Rising oil prices, devaluation of the currency, and supply chain problems have been causing steadily increasing inflation rates in Pakistan economy to be struggling. Pakistan has more difficulties lowering inflation than industrialized nations like the United States or the Eurozone, where robust monetary policies help to more under control inflation. This affects its financial markets, especially those of the rupee, stock values, and commodities prices.
On the other hand, although they are similarly influenced by inflation, foreign markets usually have more strong systems for controlling it by central bank actions. Global inflation patterns, particularly in big countries like the United States, nevertheless have knock-on effects on emerging markets like Pakistan that affect trade, capital flows, and investor attitude, though.
Final Thought:
Affecting forex, stocks, mutual funds, commodity markets, and gold, global inflation has broad consequences for financial markets. Navigating the complexity of an inflationary climate requires knowledge of the link between inflation and these markets for investors both in Pakistan and beyond. For those trying to preserve and increase their wealth, inflation calls for cautious thought whether by hedging with commodities like gold, changing currency strategies, or managing equities portfolios.
Written By Naazish Lutfi
Lutfi Institute Of Capital Market