Will Inflation Impact Your Brokerage Account?

The quick answer? It could.

Since the latter part of 2022, many consumers have been impacted by inflation. For some, inflation has resulted in sky-high credit card balances. For others, it's led to depleted savings accounts.

You're no doubt aware that inflation has the potential to impact your spending on everything from essentials to leisure. But it also has the potential to impact your brokerage account balance.

The stock market tends to be reactive

Any time there's economic news, the stock market tends to react. An unfavorable jobs report, for example, could send stock values on a downward spiral because it's a sign of a not-so-healthy economy. Similarly, inflation data has the potential to impact stock values.

Now, this might seem counterintuitive, but soaring inflation can actually be indicative of a fairly strong economy, because that situation occurs when the demand for goods exceeds the available supply. And high demand tends to ensue during periods when consumers are flush with cash and have money to pump into the economy.

But these days, high inflation readings are more likely than not to send stock values downward. That's because the Federal Reserve has made it clear that it's very unhappy about inflation.

The Fed, in fact, has been implementing interest rate hikes since early last year in an effort to slow inflation down. The logic is that if borrowing gets more expensive across the board, consumers will be motivated to cut back on spending. Once that happens, it should narrow the gap between supply and demand that's been causing inflation to soar.

But aggressive interest rate hikes also have the potential to drive the U.S. into a recession. And that's why news of surging inflation has the potential to cause investors to see their stock portfolios take a hit.

Will your brokerage account balance go down the next time inflation data comes out?

Each month, the Bureau of Labor Statistics releases its Consumer Price Index (CPI), which measures changes in the cost of consumer goods. In February, the CPI was up 6% on an annual basis. If March's reading shows a higher rate of annual inflation, it could cause stock values to plunge and for brokerage account balances to follow suit.

The thing to remember, though, is that these hits tend to be very temporary. And so if March's inflation date isn't positive, there's no need to panic. Even if your brokerage account balance declines, it might pick up again in no time.

In fact, this same advice applies any time your brokerage account balance sinks because the broad market has reacted to economic news. If you're looking at an investing window that's supposed to span several decades, it never really pays to get too hung up on what your portfolio balance looks like from one day or week to the next. In the long run, you're likely to recover from these types of blips.

Of course, a higher inflation reading might be bad news for your wallet in general. But for better or worse, that's something a lot of consumers are just plain used to by now.