Inflation Is Bad for Stocks...

With yesterday’s report showing how steeply prices fell last month, I wanted to revisit the issue of inflation’s impact on stock prices. Let me add the important caveat that correlation doesn’t necessarily mean causation. The short answer is that inflation is bad for stocks. In fact, the only thing worse is deflation. What the market likes is inflation that's nice, steady, predictable and low.

Going back to 1926, there have been 72 months of deflation coming in below -5%. The inflation-adjusted total return for that period is an annualized loss of -9.6%.

Here's how it breaks out.

Basically, when inflation is over 5% or under -5%, the market averages a real 5.5% loss. When inflation is between -5% and 5%, it averages a 15% gain.

Comments

[Vox Rationalis:]

Deflation is obviously bad. As for inflation, I'd like to see a comparison based on the rate of change rather than the rate itself. Investors hate uncertainty; in our history, highly inflationary times have been highly uncertain times.

2008 Nov 20 08:18 AM

[MSmailbox:]

One year, there was a terrific inflation in stock prices. I paid a huge amount of capital-gains tax, that year!

Deflation and over-inflation, are both bad.

Proper inflation, will always get you where you are going, though.

This is right out of the GM Owner's Manual.

2008 Nov 20 08:23 AM

[CLH:]

Runaway inflation and deflation are bad for business. I think everyone knows that. Tell us something new.

2008 Nov 20 04:38 PM