Unexpected Inflation and Real Stock Returns

12 Pages Posted: 10 May 2022

See all articles by Massi De Santis

Massi De Santis

DESMO Wealth Advisors, LLC; McCoy College of Business Administration, Texas State University

Date Written: April 26, 2022


We review the relationship between inflation and real stock returns. Stocks tend to outperform inflation over long horizons, and recent data show a weakened correlation between inflation and real returns. However, controlling for monetary shocks in the post 2008 period, expected real stock returns are significantly lower during periods of higher than average inflation. We find that a one standard deviation increase in unexpected inflation can lower expected returns by about 1% per year over a 5 year horizon. Investors concerned with inflation should consider the potential for lower expected stock returns in their plans.

Keywords: Unexpected inflation, real stock returns

JEL Classification: G11, G12, E44

Suggested Citation

De Santis, Massimiliano, Unexpected Inflation and Real Stock Returns (April 26, 2022). Available at SSRN: https://ssrn.com/abstract=4094226 or http://dx.doi.org/10.2139/ssrn.4094226

Massimiliano De Santis (Contact Author)

DESMO Wealth Advisors, LLC ( email )

111 Duck Lake Dr
Lakeway, TX 78734
United States

HOME PAGE: http://https://desmowealth.com/about/

McCoy College of Business Administration, Texas State University ( email )

San Marcos, TX 78666
United States

HOME PAGE: http://https://faculty.txstate.edu/profile/2254302

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