What is the best inflation hedge

Do stocks protect against inflation?

Unclear economic relationships

To this day, however, economists have not been able to explain why the relationship between stock returns and inflation tends to be negative. There are various theories, none of which have been conclusively proven. Obviously, the only thing that is clear is that the widespread view that companies can keep their real market valuation largely constant even when inflation is high by simply passing on rising prices to their customers is incorrect.

In order to recognize this, complex analyzes are not necessary at all. If you watch the stock market a little, you will quickly find that stock prices do not necessarily follow profits in the short term. Rather, other factors such as monetary policy and investors' willingness to take risks are decisive.

An explanation for the negative relationship between stock returns and inflation also aims in this direction. After that, rising inflation and the associated stronger fluctuations in the price level create greater uncertainty among investors. They then demand higher risk premiums on the stock market - which depresses prices. This thesis is supported by the often negative relationship between stock market valuation, measured as the price-earnings ratio, and inflation. The valuation of the S&P 500, which lists 500 large US companies, was high between 1970 and 2010 when inflation rates were low and vice versa.


In the short term, investors can by no means rely on equities to protect them well against inflation risks. This also illustrates the likelihood of achieving a positive real return on an annual basis with an MSCI World investment. Since 1970, with an inflation rate of more than 5 percent, it has only been around 61 percent. The chances were better if inflation remained below five percent: the probability of a real price increase was then 72.5 percent.

© Fairvalue 02/25/2021

Photography: European Central Bank


Elroy Dimson, Paul Marsh, Mike Staunton: The real value of money, Credit Suisse Global Investment Returns Yearbook 2012.

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