In 2023, you will see many people saying things such as: "Price/cost starts to scale up", or the sentence "In the current inflationary period, everything will increase in price!". The statements above represent a general increase in the average price in an economy, accompanied by a decrease in the purchasing power of money, collectively known as inflation. This leads to an increase in the cost of living in general and a devaluation of the currency in particular.

So what is inflation really? Let's find out the details.

What is inflation?

Milton Friedman famously said: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” 

Inflation is the general increase in prices year over year. This increase is usually measured by the cost of a shopping cart from the typical household. As people need more money to buy the same amount of goods and services, the value of money decreases and the cost of living becomes more expensive. The higher the inflation, the more the currency becomes depreciated.

Causes of Inflation

More jobs and higher wages increase household incomes and lead to a rise in consumer spending, further increasing aggregate demand and the scope for firms to increase the prices of their goods and services. When this happens across a large number of businesses and sectors, this leads to an increase in inflation.

What is Inflation?

Money, that's a big impact. There are two main types of inflation: “Cost-Push Inflation” and “Demand-Pull Inflation.” Ultimately, both causes will pass on to consumers in the form of rising prices.

Cost-push Inflation

There are a few factors that can cause costs to increase. An increase in the price of raw materials, for example, can have a knock-on effect, leading to price increases throughout the economy. Rising energy and transportation costs could also push up prices. Higher wages and taxes are other examples of costs that, after all, will all pass on to consumers in the form of “rising prices.” Cost-push inflation applies to most economies.

Other events might qualify if they lead to higher production costs, such as a sudden change in government that affects the country’s ability to maintain its previous output. However, government-induced increases in production costs are more often seen in developing nations.

Demand-pull Inflation

In an expanding economy, a phone company experiences a sudden increase in demand for its product. However, as the company's resources were already operating at maximum capacity, they were unable to increase supply. Instead, they raise the price of the product. 

The above is both an explanation and an example that causes inflation to be caused by demand-pull. In general, if consumer spending increases across the economy and businesses respond to this by increasing selling prices instead of increasing output, inflation will also escalate. 

Impacts of inflation on the Forex market

“2% is the US Federal government's inflation target” Quote from How Money Works.

Growth in an economy is influenced not only by the money supply but also by the speed at which money moves from one person to another. This is also known as the speed of money. The velocity of money is a measurement of how many times a currency has been used in transactions for goods and services over a period of time.

Banks' 2% interest rate target

If the supply of money, as well as the speed of money, increases rapidly, the supply of goods and services may not keep up with the rate of demand - it may be necessary to use more money in pursuit of fewer goods. This can happen if the economy expands too quickly, perhaps due to a sudden increase in the money supply as a result of monetary policy. Manufacturing companies respond to this by “raising their prices”, triggering demand-pull inflation.

Inflation has a significant impact on the Forex market . People's confidence in the currency of the economy will be lower, the exchange rate will also create high and unstable spreads. From there, banks will also limit loans and switch to reserves, tighten supply -> Enterprises will not be able to borrow money to maintain business operations -> Reduce personnel -> Reduce supply while the demand is still increasing -> Increase the selling price of products ->  Inflation.

How to increase income during an inflationary period

There are many ways to increase active and passive income through the Forex market. Forex trading is similar to trading stocks. Here are some steps to get you started on your Forex trading journey

Learn about Forex

Although not complicated, Forex trading is a completely separate market and requires specialized knowledge. The leverage ratio for Forex trades is also higher than for stocks. And, the factors that drive currency price movements are different from those that drive the stock market. 

Set up an account with Broker 

You will need a Forex trading account at a brokerage firm to start trading. 

For beginner traders it is recommended to set up a trading account with low capital requirements, for example you can start with a Cent account. Such accounts have variable trading limits and allow brokers to limit their trades to as low as 1,000 currency units. 

The Cent account will help you become more comfortable with Forex trading and define your trading style. 

***Refer to Cent account details: https://www.fxce.com/mt5-account

Build a trading strategy

Although it is not always possible to predict and time the movements of the Forex market. Having a trading strategy will help you to set general guidelines and a trading route. A good trading strategy is based on the reality of your situation and finances. 

Remember, Forex trading is primarily a highly leveraged financial environment. But it is also more profitable for those willing to take the risk. 

Always following your trading account

When you start trading, always check your positions at the end of the day. Most of the trading software already provides a daily transaction accounting feature. Please ensure that you do not have any pending positions and that you have enough Balance to execute future trades.

Control your trading emotions

Beginner Forex trading is full of emotions and unanswered questions. Should you hold your position a little longer for more profit? Obsessing with such unanswered questions can lead you down a path of confusion. 

That is why it is important not to get caught up in your trading positions and to cultivate an emotional balance between gains and losses. Be disciplined about closing your positions when necessary. 

Trading psychology

Use Social Trading Platform with CopyTrade tools to optimize passive profits. FXCE CopyTrade Engine will give value to many Traders and Investors. This is a tool that always accompanies investors and transactions toward sustainable profits.

Find out Top 5 social trading platforms in 2023

Summary

Inflation is an increase in the general price level of goods and services in an economy. As the price of a good increases, with that same amount of currency you will only buy less of the good than before. 

Finally, inflation shows the loss of value of the solvency of a currency in a country.

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