“Inflation is when prices rise, and this includes asset prices. Over the long-term stock prices rise along with inflation, as do other investment assets. The key here is “long-term,” because inflation may cause short-term volatility in stock prices. Stock prices are sensitive to interest rates, which are affected by inflation expectations.
Anyone investing in 1970s remember the damage caused by the oil crisis. In this case, persistent inflation held stock prices down for a long time. However, today’s economy is structurally different. In the 1970s, many manufacturing stocks were hurt as the cost of energy rose which hurt profit margins. Today’s service-based stocks are less sensitive to input prices.”
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