As an investor it is important to understand how economic indicators can impact stock markets, investing, and the value of your investments.

The key to your success will be looking at these economic indicators, extracting what Economic Indicators and key statistics that show where the economy is headed by monitoring inflation.

The reason why inflation is of importance is based on the fact that it influences the level of interest rates. Stability within the economy is maintained as long as inflation is kept under control. Rising inflation reflects rising prices caused by increasing demand and decreased supply.

In other words, the increase in prices of goods and services would erode the purchasing power of the money you make, on the assumption that the money you earn does not increase in line with inflation. To put it simply, Governments use economic indicators as tools to ensure stability within the economy. Consequently the individual indicators of inflation like the consumer price index; unemployment and gross domestic product cannot be directly manipulated.

Interest rates determine the willingness and ability of individuals and businesses to borrow money and make investments. Changes in economic activity, when triggered by changes in interest rates, for companies, higher interest rates often mean lower profits. If interest rates rise, companies have to pay more, to borrow the money they require to fund growth of their buisness.

This translates into higher prices for their goods upsetting the price supply equilibrum. Especially if customers are buying on credit and have to pay higher interest rates for them to borrow. Potential customers may decide they cannot afford to buy products as the cost of credit is high.

The eventual decline in company sales and earnings is something investors anticipate as soon as rates go up. The result is that stock prices go down before the effects of the increased interest rates are actually felt on the company's bottom line.

When interest rates fall, company borrowing costs are lower, so their profits on the same level of sales will be higher. so , customers who buy on credit are more comfortable buying if they are paying lower rates, so the more they purchase.

This creates higher sales, which will lead to increased company profits. Eventually higher profits will lead to an increase in stock prices. This situation creates an environment where investors are typically ready to pay higher prices as soon as the Central Bank intervene to cut interest rates in the anticipation of the cycle of increased profits. As an investor it is important to remember that the price of your stock will change throughout its lifetime because the price you actually obtain will be determined by current market conditions and more importantly interest rate fluctuations.

Helping you with your Financial Education

The Equity Scholar Team

Equity Scholar