Neither the S&P 500 nor Tesla have since reached the highs they hit on Jan. 3. The S&P 500 begins Friday’s last trading session of the year nearly 20 percent below where it was on the day – and the year is set to be its worst year-to-date performance since 2008. Cryptocurrency giants like FTX have fallen and debt is no longer cheap.
Frequently asked questions about inflation
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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual change in the price of essential goods and services such as food, furniture, clothing, transportation and toys.
What Causes Inflation? This may be the result of increasing consumer demand. However, inflation can also rise and fall on developments that have little to do with economic conditions, such as E.g. limited oil production and problems in the supply chain.
Is inflation bad? It depends on the circumstances. Rapid price increases mean problems, but moderate price increases can lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation usually spells trouble for stocks. Financial assets in general have historically performed poorly during inflationary booms, while tangible assets like houses have held up better.
But even as the US economy heads toward a possible recession, the Federal Reserve has said its work is far from over. Inflation, while starting to cool, is still far too high and interest rates are expected to continue rising, portending further pain.
“Central banks have been driving markets this year on inflation and that will continue into 2023,” said Kristina Hooper, chief global market strategist at Invesco. “This is a very, very dramatic, historic moment. We have all witnessed an extraordinary sequence of events, beginning with the pandemic.”
The Fed’s challenge became even more difficult in late February when Russia’s invasion of Ukraine sent food and energy costs skyrocketing and created a crisis in poorer countries dependent on oil and grain imports. In March, the Fed began raising interest rates.
Higher interest rates are central banks’ main anti-inflation tool. As interest rates rise, so does the cost of borrowing, which slows demand in the economy and theoretically dampens further price increases. Yields on 10-year US Treasuries, which support borrowing costs around the world, have risen 2.3 percentage points this year, the largest annual rise on record for data dating back to 1962. Other debt rose higher.
Higher costs also mean lower profits for companies and push down stock prices. This was particularly true for technology companies, whose growth was supported by low interest rates. The Nasdaq Composite Index, which is chock full of tech stocks, is down over 30 percent in 2022.
As investors lost money in the stock markets and households faced skyrocketing costs from inflation, other, more speculative markets also went flat. The price of Bitcoin, one of the most well-known cryptocurrencies, plummeted, and so-called meme stocks like GameStop and AMC Entertainment, whose share prices have been boosted by a new generation of amateur investors during the pandemic, fell steadily throughout the year.
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