The Effect of Inflation on Stock Prices

Inflation's effect on the stock market is complex

When the number of units of currency it takes to purchase a certain good or service increases over time, this is said to be an example of inflation. The effect of inflation on stock prices is complex, but it generally leads to an increase.

Features

Stock prices can be considered both a fungible good--one that can be easily bought and sold--and a measurement of a company's value. As inflation increases, the price of the stock, like other prices of goods in the economy, will generally rise as well.

Considerations

Inflation can have various effects on a company's health. While some companies may be uninjured or even benefit from inflation, others may be seriously harmed if customers can no longer afford their products. In these cases, inflation can lead to a decline in a company's stock.

Inflation

The overall effect of inflation on stock prices depends on its specific economic effects. During economic booms, greater investment and growth may raise stock prices and increase the rate of inflation. However, in other situations, such as inflation triggered by a rise in energy prices, the stock market may suffer as companies experience a decline in sales and investors move their money out of stocks.

References

• National Bureau of Economic Research: Inflation, Tax Rules and the Stock Market
• Federal Reserve Bank of San Francisco: How does monetary policy affect the U.S. economy?
• InvestmentU: Inflation's Effect on the Stock Market