RE: Fool6 Jan 2022 09:04
Hooray for… inflation?
The word inflation has been prominent in many headlines over the past couple of months. And it’s understandable why. In November 2021, the Consumer Prices Index (CPI), which acts as a good indicator of inflation, rose by 5.1%! That’s the highest price increase in nearly a decade – September 2011, to be precise.
As a quick and simplified reminder, inflation causes prices of materials and, in turn, products to go up. That’s horrible news for consumers since it inflates the cost of living, thus reducing the value of any savings. But this could actually be fantastic news for Lloyds and its share price. Let me explain why.
Like any bank, Lloyds makes a good chunk of its money by issuing loans to businesses and individuals. The most common type for the latter group would be a mortgage. The company then charges interest on these loans to generate a profit as well as mitigate potential default risks.
During times of high inflation, the Bank of England can increase interest rates. And suddenly everyone with a variable-rate mortgage starts paying higher monthly premiums. This reduces the total money in circulation, bringing inflation back down.
While paying higher interest, again, sucks for consumers and businesses alike, it’s music to the ears of banks like Lloyds. After all, if the firm can charge higher rates on its loans, Lloyds’ profit margins get that much wider, boosting its share price