What Happens to Stocks When Inflation Is High? (How Does Inflation Affect Stocks)

Inflation is one of the most popular and important economic indicators. It is monitored by everyone — businesses, financial regulators, and investors. Not only does it guide regulators in their policies, but also, it affects businesses, which in turn, influences investors. But what exactly is inflation, and how does it affect stocks? And more importantly, how does high inflation affect stocks?

Backtests reveal that inflation is bad for stocks in the short term. In the long run, though, companies should be able to pass on increased prices to consumers and resume their uptrend.

Inflation is a gradual reduction in the purchasing power of a currency over a given period due to the general increase in the prices of goods and services. In other words, you can buy less for $1 now than in the past.

In this post, we look at inflation and how it affects stocks. At the end of the article, we provide a backtest.

What is inflation?

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Inflation can be defined as a gradual decrease in consumers’ purchasing power over tim