It is very important to understand what inflation is because it can decrease the value of return on your investment. It affects all aspects of an economy, from business investment, employment rates and consumer program to interest rates, tax policies, and government programs. No matter where you invest your money, you will have to face the impact of inflation everywhere. You may have observed that many investors invest in an oil commodity market in order to diversify their portfolio and to minimize the risk of financial loss.
Although, it is a reasonable decision to take but they should not ignore the effect of inflation on their investment because inflation and oil prices are interconnected in a cause and effect relationship. As the prices of oil fluctuate, inflation fluctuates in the same direction. The main reason of inflation and oil prices to move in the same direction is that the oil is considered to be a major factor in an economy. The whole economy is somewhat dependent on a frequent supply of oil. It is a critical factor that is used in heating homes and fuelling transportation and if the input cost increases, so does the cost of the end product. For example, when the oil prices increase, the cost of making plastic increases in a plastic industry, companies pass these costs to the end consumer and hence, oil price increase and so does inflation.
Whenever you plan to invest in the oil commodity market, it is essential to speak to Your Personal Financial Mentor because he is aware of the prevalent price trends in an oil commodity market and the effect of inflation on these prices. He can help you take a better decision by keeping in mind your financial goals. Therefore, being an investor, you should be aware of all the factors that can adversely affect your investment in the oil commodity market and devise a strategy that will help you achieve a sustainable growth in the long run.
The relationship between inflation and oil started fading after 1980s and during the Gulf War oil crisis in 90’s, prices of crude oil increased from USD 20 to USD 40 within six months but a slight change was observed in inflation. With the passage of time, this relationship is deteriorating and the strong correlation between inflation and the prices of oil that was obvious in 1970 has weakened dramatically. However, it cannot be said that it has completely ended because inflation is a never ending process and it will keep on affecting the global oil commodity market. With the pound hitting low against the dollar, import prices are increasing and with the increasing demand of crude oil in the coming months, a lot more inflation is expected.
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Categories: Oil Commodity Market