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Despite this negative sentiment, the stock market seems to be thriving. On October 21, the Dow Jones and the S&P 500 reached record highs.
Nevertheless, these indices alone don’t provide the full picture. Inflation can distort the perception of market gains. While it may seem like investments in the stock market are generating exceptional returns, these returns are more modest when adjusted for inflation.
In essence, inflation not only impacts consumers, but also investors—encompassing most Americans. This hidden tax on savings and investments silently diminishes real profits, leaving individuals with significantly less purchasing power than it appears on the surface.
To illustrate the impact on someone who invested in the stock market in January 2021, you compare the Dow Jones Industrial Average with its inflation-adjusted counterpart. While nominal stock market gains since 2021 show a rise of 39 percent, this growth diminishes to just 15 percent when adjusted for inflation.
Inflation, often disregarded in stock market conversations, has a tangible effect on investment returns. Investors who solely focus on nominal gains without considering inflation may develop a false sense of optimism about their portfolio’s performance.
So how does inflation have such a significant impact?
Simply put, as prices increase, even substantial returns lose their purchasing power. More money is needed to purchase the same goods and services, eroding the real value of one’s gains. As costs rise, higher earnings or investment returns don’t go as far, making it challenging to keep up with the actual cost of living.
Inflation is not solely a consumer concern—it affects everyone, from families struggling to make ends meet to investors on Wall Street. The disparity between nominal market gains and their inflation-adjusted equivalents helps explain why many Americans, despite a seemingly flourishing stock market, express worries about the economy.
This deceptive growth underscores the importance of focusing on controlling inflation. Reducing unnecessary government spending and curbing inflation is crucial not only to preserve the true value of investments but also to ensure that economic prosperity is felt across all segments of society.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
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