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Home > Inflation and Deflation for Dummies

Inflation and Deflation for Dummies

inflationInflation and deflation are the two important economic indicators in the world of binary options trading. Inflation is the rise in the price of the asset in the market while deflation occurs when the asset’s price decreases. Inflation happens when there are a lot of demands for a product and it is during this time that the manufacturers and providers will grab the chance to increase the price to make more money. The problem with inflation is that when the price for these products increase and the income of people and unemployment remains the same, they will find it harder to afford these things. So, maintaining a balance in the inflation and deflation is crucial for achieving a good economy.

Look at this inflation calculator.

On the other hand, deflation happens when the manufacturer has produce much more products than the demand in the market. For example, the European Union just recently put a restriction on the import of goods from Russia so the Russian manufacturers are going to have problem clearing their inventory. Because they are not able to clear off these inventory, they have to cut cost by reducing the staff and the consequence is that many people will be unemployed and the economy will enter into recession.

Countries that have lower inflation rates have better currency values. The central bank will take action by increasing the short term interest rate to overcome inflation and balance the economy. The purpose of increasing the short term interest rate is to encourage people to borrow loans. Doing so allow the bank to play a role in influencing the price of consumer products and national currency’s values indirectly. The central bank has a mandate to keep the inflation to below 2% so they have a duty to take action before the money will lose value. Inflation rates here.

In the USA, the inflation rate is determined by a gauge called Consumer Price Index (CPI). The monetary policy of a bank is based on the CPI level. The U.S. Bureau of Labor Statistics will publish the CPI in between the 13th and 19th of every month. The prices of several products are taken into account when calculating the CPI including transportation, education, housing, food and beverage. As a binary options trader, you must pay attention to the CPI because the increase or decrease of the inflation rate can affect the demands of the goods. Usually, you can find the CPI for the economies worldwide in the economic calendar including USA, Europe, UK, Australia and Japan.

Other countries will also release their own consumer price index and they will be released at a different price. The way the Consumer Price Index (CPI) is calculated vary across the different countries. For example, the USA CPI is calculated by looking at the core inflation for example inflation on the core resources like oil and energy. Before you start trading, you should study the information in the consumer price index (CPI). The CPI gives a monthly overview of the fluctuation of the prices of the products. It will be best that you study the consumer price index as soon as it is released into the public.

If the inflation is higher than 2-3%, the value of the stocks will decline because the average consumer will not be able to afford the expensive products. When there are lesser people buying the products, the value of the stocks of the companies will also decline. Deflation will likewise reduce the value of the stocks. During a deflation, sellers will reduce the price to make it affordable for people because of the lay off situation and many people don’t have money to buy the expensive goods.

The binary options trading signal you receive will depend on the changes in the inflation rate. You must always monitor the financial news and pay attention to the inflation rate of the asset you are trading. Having a good understanding on the inflation rate of the forex, stocks or indices you are trading on will increase your chances of winning the trades.

In conclusion, it is crucial that every binary trader become familiar with the concepts of inflation and deflation. Understanding how inflation affect the prices of your financial assets can increase your winning rates.

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