The Effect of Inflation on Stocks

The rate of return on stocks is highly variable due to a variety of factors. Because stock returns vary to such an extent, it is not easy to measure the impact inflation has on them. Recently, however, some empirical evidence has demonstrated a link between inflation and a stock's total return: when inflation has increased, the real rate of return on stocks has tended to decrease.

According to market watchers such as Ibbotson Associates, stocks have outpaced inflation in the United States for the study period 1926–2000. However, the reason that stocks have outpaced inflation is because of the significant risks inherent in stock investments and their potential rewards. However, not every stock has performed as well as the market, and not every stock that rises provides a rate of return higher than inflation. Past performance does not guarantee future results.

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