6 Tips For Trading In An Inflationary Environment


If you are worried about inflation, don’t be, you can still make a profit, and you can still save your money to stop it from decreasing in value. Inflation has hit an all-time high throughout the world. With the increased issues with supply chains and the rebound of the pandemic on top of the ridiculously expensive energy prices, it can feel like all is lost for both businesses and consumers.

For consumers, inflation is the increase of higher prices for both goods and services as well as a loss of purchasing power due to less expenditure due to income levels not being able to keep up with the rising expenses.

Unavoidable spikes in inflation are harmful to a business, profit margins decrease, and the ability to plan is more difficult. This in turn hinders results in terms of investments, growth and the ability to secure long-term contracts.

For investors, it means that they have to move their money to assets that do well with inflation, or at least rise with inflation to reduce losses. In this article, we will go through some top tips for investing in an inflationary market.

What Has Influenced Inflation?

This start of this period of inflation started in 2021 when prices started to increase with almost everything, this was driven by the reopening of the economy after COVID. In 2022, a further issue become more apparent.

In 2022, the Russian invasion of Ukraine has made things much worse and has caused a number of issues with the world.

It has made energy prices even more expensive, has escalated supply chain issues and has increased the price of many household items due to the increase of commodities such as wheat due to Russia and Ukraine being the largest suppliers in the world.

What Should Traders Consider During Inflation?

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Forex trading is extremely convenient when you are able to trade online which can encourage investors to rush into trades without ever considering if there is a better offer.

When trading, this can be extremely dangerous, and when we are in an inflationary environment, this can be catastrophic. Many traders will completely stay away from forex trading during inflationary periods and turn to something different such as stocks and bonds.

However, there are some traders who still like their chances when it comes to investing, but these professionals need to take some safety measures to mitigate as much risk as possible. One fact that you should be aware of is that it is essential to understand what is going on with international news and events which could influence forex trading and prices.

For example, the UK and the U.S. are putting their efforts toward curbing inflation. With this in mind, there are external factors such as the Ukraine crisis that have affected currency, but if you are here to weather out inflation, then there are some steps that are essential to your success.

3 Steps for Essential Success During Inflation

Tips For Trading In An Inflationary Environment

1. Go Towards Developing Markets

When inflation happens, the purchasing power of the US dollar decreases. Due to this happening, other currencies are also affected in a negative way. This being said, it can create some good opportunities for traders to preserve their capital and generate profits from developing economic markets.

Many inexperienced traders will be unfamiliar with these currencies and will struggle to find better opportunities without expert help from more experienced traders.

To put it simply, the best opportunities for trading in these economies include trades with high yields, suppressed pricing and regular price volatility. From these trades, it can cause an upswing in price as the more dominant currencies continue to decrease.

2. Track Economic Inflation Controls

It can be difficult to evaluate opportunities when trading in an inflationary market which encourages many investors to steer away from forex trading, but for some, this is unavoidable when they understand that inflation could be here for a long time. So instead of stopping forex trading completely, traders will be able to identify methods to ride the tide of inflation whilst also trading effectively.

If this is the case, then traders should understand that there are two forms of inflation. That of which is managed, and that of which is unrestrained. Managed inflation is where there are economic controls that aim to restrict its effects.

A good example of this is the UK and its efforts to slow inflation within England. This is managed inflation where the government are creating short-term economic stress, but this helps to not alter the long-term forecast of the currency in as much as a drastic manner.

It is understandable that forex traders are concerned about the short-term volatility of a currency as it is more relevant than long-term forecasts, but traders should be aware that larger currencies such as this and the USD always balance themselves out eventually.

3. Buy Currencies When The Purchasing Power Is Low

When inflation is a significant contributing factor in reducing the purchasing power of a currency, it presents many opportunities for investors to buy low and then cash in once the currency’s economy starts to slow down.

If you move a currency such as the USD into a developing market in advance of inflations pulldown of the exchange value,  you could be wondering when is the best time to return your assets to the USD market in the advance of when the value is going back up.

When Britain finalized Brexit, the value of the GBP declined significantly. Even now, 3 years later the pound is still a lot lower than it was pre-Brexit. If a trader can identify some indication that a bounceback is due, there could be significant profits to be made.

Be Aware Of Other Factors That Affect Currency Value

While inflation can have a huge influence on exchange rates, it is not the only factor that contributes. Even when there is an inflation crisis, there are many other factors that influence exchange rates including:

4. Overall economic strength and activity

Economic strength plays a huge part in exchange rates if the economy has low employment rates, how is anyone going to afford to put money into the economy? Low retail sales, consumer spending and poor market values all contribute to exchange rate values.

5. Geopolitical news

Just as the Russian invasion of Ukraine is affecting exchange rates, other political conflicts, trade agreements and economic activities influence exchange rates.

6. Fluctuating currency values around the world

Inflation hasn’t just hit the most affluent countries, it is happening around the world. This leads to muted price volatility for many of the standard pairs.

Final Thoughts

Inflation can significantly disrupt financial markets which in turn brings a lot of forex scams that arise which many desperate traders will fall for.

As long as you have a strategy in place and read all the signs, you will be able to still make a profit, or at least stop your money from losing value.

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Author Bio: Elliot specializes in a range of financial topics including forex scams and how to avoid them. He also understands how inflation is affecting the current landscape of investments.