Deflation and Stock Prices

26 Pages Posted: 27 Sep 2016

Date Written: September 19, 2016


While the literature on inflation and stock prices is plentiful, there is little literature on deflation and stock prices. This paper explores the empirical data and makes a theoretical analysis of the likely impact on stock prices when expectations changes from inflation to deflation. The main conclusions are: 1: The 1930s was a statistical outlier and not representative for a deflationary period; 2: Deflation does not seem to create recessions, causality goes the other way; 3: Real stock returns are lowest in high inflation environments, while real stock returns are positive and around average in the periods leading up to and following the onset of deflation; 4: The empirical evidence and the theoretical exercises are mixed as regards the impact on P/E ratios from deflation. When moving from low inflation to mild deflation, P/E is virtually unchanged; and 5: Deflation illusion might explain the surprisingly small decline in P/E ratios in the face of deflation.

Keywords: Deflation, deflation illusion, stock prices, price-to-earnings ratio

JEL Classification: E31, G12

Suggested Citation

Clemens, Michael, Deflation and Stock Prices (September 19, 2016). Available at SSRN: or

Michael Clemens (Contact Author)

BankInvest Group ( email )


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