Inflation is a condition in a particular country’s economy where the amount of available currency outstretches the GDP figure for that country. This that is known as inflation, and higher prices are a result of this situation.
This affects the Canadian investor by causing consumer pricing to rise, thus leaving the investor with less money to invest with after buying groceries and filling their gas tank. This inability to invest also affects the stock market, leaving companies with less avenues of capital acquisition. For example, if the CPI levels rise considerably, markets such as the TSX can experience a lull in trading causing its index to drop. This could indicate that an economy is either stagnant or heading towards recession. Of course, this isn’t in the best interest of any country and if left unchecked, would lead to a wildly fluctuating market with tremendous risk such as the markets just before Black Tuesday, October 29, 1929. We have learned our lessons since and safeguards have been put in place to ensure that the market won’t bottom out like that again.
At some point of your life, you probably thought to yourself: If governments can print money, why the hell don’t they just make everyone a millionaire? The answer to this question is now obvious: The Equation of Exchange, that’s why. If the government just started printing money like crazy, the rise in price level would just eat the newly found wealth up. Each dollar bill would gain three zeros, but you couldn’t buy more with it than before.
Of course there can be much more trivial causes for inflation than a growing money supply. Prices are determined by an equilibrium of supply and demand. If demand drops, the retailers have to lower their prices to sell off their stocks. Similarly, if demand suddenly increases, the retailer will be able to set higher prices, resulting in inflation. This happens for example when a new technology comes along that quickly rises in popularity. Appropriately, this kind of price level growth is called a demand-pull inflation.