After many years of historically low-interest rates following the 2008 financial crisis, it seems that surging inflation will force the Federal Reserve to increase its rates.
It’s still unknown how the conflict in Ukraine will impact the Fed’s plans. Although the Ukraine crisis may slow the pace of the increases, there’s no reason to doubt the rises will still occur from March 2022 onwards.
On one level, an increase in inflation should mean that a currency loses its value. After all, if you can buy your weekly groceries for $100 one month, but inflation means that the same grocery shop costs $110 a few weeks later, the purchasing power of a single dollar has reduced.
Usually, inflation harms a currency relative to the currencies of other nations. Yet this assumes that other currencies haven’t also experienced inflation — and rising prices have practically been a worldwide phenomenon since Covid-19.
A currency’s value relative to others also links to interest rates. When the Fed increases interest rates to control inflation, it may increase the demand for foreign investment since returns become higher.
Oil is notorious for being one of the most volatile markets there is, and it’s hit the headlines even more recently for being volatile due to the Russia-Ukraine conflict.
Rising prices and oil are interconnected — higher inflation pushes oil prices up, but more significant oil prices raise prices elsewhere since almost everything in the economy relies on oil.
Bonds can be a good predictor of prices and inflation. The interest rates that bonds offer to investors partly depend on how much inflation a country is experiencing.