Do stocks protect against inflation? Depends on which inflation and which stocks

Behind the great economic headlines often hides a wide world of fascinating academic research, of which most of the public is unaware. We are pleased to bring this column, which will connect current events to academic research.

Through the column we will seek to make the relevant research information accessible to managers, regulators, and anyone interested in management, the capital market and the economy, all in clear and concise language.

Anyone who wants to expand the canvas and dive into the studies themselves, will be able to do so through the sources attached at the end of this column. Prof. Dan Amiram, CPA and Deputy Dean of the Faculty of Management at Tel Aviv University, and Dr. Ari Ahiez of the same faculty, are experts in capital markets, finance and innovation, and will lead the column with researchers from other fields, as appropriate.

Prof. Dan Amiram is the Deputy Dean of the Faculty of Management at the University of Tel Aviv; In charge of the Chair of Capital Markets and Financial Institutions, and Director of the Institute for Business Research in Israel; Serves as a director at Mercantile Bank and GlobalTech Alignment and chairs the UN Internal Control Advisory Committee. Dr. Ari Ahiez is a lecturer in the same faculty in the fields of the capital market, corporate finance and fintech; the director of research and a partner in Sitactic

The prevailing opinion in the capital market, and various recent press releases, is that the stock market provides good protection against inflation, ie stocks rise when prices in the economy rise. This view is based on the assumption that in times of inflation companies manage to raise the prices of their products and services, and thus the flows they produce not only do not erode but sometimes they even manage to increase their profitability.

No Strings Attached

Surprisingly, studies in historical data actually show that the relationship between stock returns and changes in inflation is in most cases negative (Madepool and Asgari, 2019). In a major historical study, Modigliani and Cohen (1979) argued that this is because when inflation rises investors demand a higher return on investment in assets (to compensate them for price increases). Therefore, in order to achieve the higher return, asset prices need to fall on average (due to higher discount rates). Hence, according to the researchers, the negative connection between the change in inflation and stock returns is created.

A later study (Lee, 2010) examined the relationship between the change in inflation and stock returns over several decades in about 11 developed countries such as the US, England, Germany, Japan, etc. As mentioned above, the relationship between inflation and equities was indeed found Significantly negative, however, a closer examination revealed many interim periods in which there was actually a significant positive relationship between inflation rates and stock market returns (for example the US before World War II or some European countries in the 1980s).

Prof. Dan Amiram / Photo: PR

Go back to the sources

How can one explain the fact that sometimes the relationship was positive and sometimes negative? The researchers (1999) proposed an explanation for the phenomenon in that it is not possible to examine the relationship between inflation and stock returns in general, since it depends on the source of inflation. Demand-side inflation, for example as a result of expansionary monetary policy, has a positive effect on companies’ revenues and profitability. Therefore, demand-side inflation leads to a positive relationship between inflation and stock markets.

However, supply-side inflation, for example as a result of rising commodity prices, leads to damage to companies as a result of rising prices of production sources. Therefore, supply-side inflation leads to a negative relationship between inflation and stock markets. In this study and in the previous study mentioned (Lee, 2010) it was indeed found that the type of source of inflation is one of the main explanations for the link between inflation and stock returns.

Another significant study (Bons & Co., 2020) sought a way to examine the type of inflation over time and its effect on stock returns. The researchers examined the relationship between changes in private consumption and the change in inflation in previous months. This is expected to help differentiate between demand-side and supply-side inflation, thus identifying whether equities are likely to hedge inflation. The study showed that as the link between inflation and private consumption strengthens, stocks with high inflation protection yield a high yield of about 5.2% of stocks with low protection against inflation.

Dr. Ari Ahiez / Photo: PR

Dr. Ari Ahiez / Photo: PR

Not all stocks are equal

In addition, if the ability to hedge the inflation of stocks changes over time, there may also be differences between different sectors in this hedging. A recent study (Ang, Brier and Senior, 2018) examined which stocks have a negative relationship between their yields and inflation and which stocks have a positive relationship. It appears that the sectors with the most negative relationship are the finance sector and the consumer goods sector. In addition, the sectors that have shown the most positive relationship, and therefore have a better hedging ability against inflation, are the energy sector and the technology sector.

In conclusion, after several decades of low inflation, price increases in recent months have resurfaced the need to protect against inflation. The studies presented above emphasize that when deciding to hedge the risk of inflation by holding stocks, one should examine the source of the rise in prices and choose the stocks in sectors that better protect against inflation.


Madadpour, S., & Asgari, M. (2019). The puzzling relationship between stocks return and inflation: a review article. International Review of Economics , 66 (2), 115-145

Modigliani, F., & Cohn, R. A. (1979). Inflation, rational valuation and the market. Financial Analysts Journal , 35 (2), 24-44

Lee, B. S. (2010). Stock returns and inflation revisited: An evaluation of the inflation illusion hypothesis. Journal of Banking & Finance , 34 (6), 1257-1273

Hess, P. J., & Lee, B. S. (1999). Stock returns and inflation with supply and demand disturbances. The Review of Financial Studies , 12 (5), 1203-1218

Ang, A., Brière, M., & Signori, O. (2012). Inflation and individual equities. Financial Analysts Journal , 68 (4), 36-55

Boons, M., Duarte, F., De Roon, F., & Szymanowska, M. (2020). Time-varying inflation risk and stock returns. Journal of Financial Economics , 136 (2), 444-470

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