Thu 5 Oct 2006
Most mysterios term in whole world market and economy theory.
Inflation - is it bad or good? How it affects world economy? How it affects Stock Market? What influence of inflation rate on key interest rates? And, finally, how foreign currency exchange market are influenced by world inflation?
Basically, inflation rate is ratio between present prices and prices on the same products one year ago. You could also think about it from other point of view. Inflation is how cheaper money in your pocket will be one year later.
For usual consumer inflation is bad. Shure, on the same amount of money you can buy less food one year later. We all remember bad cases of inflation like 20% per day - when people get salary each day and need to spend these money immediately, because tomorrow all world around will be 20% more expensive. Usual consumer wants 0% inflation, or in dreams even negative inflation - deflation.
Inflation in reasonable range is healthy for economy. Normal annual inflation rates in the range 2-5%. Why healthy? Because inflation forces money to work and make more money. It is not profitable to keep money in bank account, because normally bank rates are lower than inflation or more less equal.
By the last reason, inflation rate is the base of the bank interest rate and national key interest rate.
About influence of key interest rates on foreign exchange market forex we discussed earlier.