Inflation wreaks havoc on the market in a couple of ways.
It forces the Federal Reserve to raise interest rates much quicker than intended. That in turn pulls liquidity out of the market.
You can liken liquidity to an ocean tide. The old saying goes: “A rising tide lifts all boats.” But the exact opposite happens when the tide goes out. When liquidity drains out of the market, the price of everything falls.
Inflation, and the Fed’s higher interest rates that accompany it as it tries to settle prices down, also tends to punish growth stocks in particular.
This post appeared first on Money & Markets, LLC.