Here's What Happens to the Stock Market When Inflation Rises

Not shockingly, higher inflation readings tend to lead to lower stock values.

Financial experts spent weeks waiting for an inflation reading to come in for January. And on Feb. 14, the Bureau of Labor Statistics released its most recent Consumer Price Index (CPI) reading.

On an annual basis, consumer prices were up 6.4%, which was actually a decline from December's 6.5% reading. But on a monthly basis, consumer prices rose 0.5%. And that sent the stock market reeling.

Following the news of higher inflation in January than December, the Dow Jones Industrial Average fell by 0.77%. The S&P 500 index dropped as well, as did the Nasdaq.

Interestingly enough, financial guru Graham Stephan predicted that something like this would happen. In an early morning "CPI Day" tweet, he made some calls about the direction stocks would take based on various CPI readings.

If today's stock market plunge has impacted your brokerage account balance, you're in good company. And it's also not really something to worry about.

Why soaring inflation was bad for stocks

Inflation has been putting a strain on consumers, forcing many to raid their savings and rack up scores of credit card debt to make ends meet. But higher inflation also means that the Federal Reserve may get more aggressive with future interest rate hikes. If that happens, it could easily drive up the cost of consumer borrowing across the board. And that could set the stage for an economic recession.

To put things another way, today's inflation report was generally regarded as unfavorable economic news. And whenever news of that nature hits, stock values tend to plummet.

But that doesn't mean that stocks won't recover quickly. In fact, if you check your brokerage account tomorrow, you may even find that its balance is back up. That's how fickle and reactive the stock market is.

Of course, the frustrating thing is that sometimes, the stock market can react poorly to positive economic news. In recent months, low levels of unemployment, as reported by the Bureau of Labor Statistics on a monthly basis, have caused stock values to drop -- the logic being that if jobs are being added and unemployment is low, inflation is less likely to fall.

The point, therefore, is that it's best to not get hung up on daily stock market movement. Rather, focus on your long-term goals, and think long term rather than day to day.

An important lesson to learn

This isn't the first time the stock market has fallen on the heels of unwanted economic news, and we can bet it won't be the last. That's why a good rule of thumb is to not react yourself to stock market dips. If you see your portfolio balance drop following a news event, just ignore it.

The only way to lose money in the stock market is to sell off assets at a lower price than what you paid for them. If you don't do that, the losses you're seeing are more likely than not to be temporary in nature. And while it's never pleasant to log into your brokerage account and see a lower balance than you had the day before, that's par for the course when you own stocks. The sooner you recognize that, the less stress you might experience as an investor.