Does Inflation Make Stocks Go Up? A Guide

Does Inflation Make Stocks Go Up?

Early on, investors often ask a simple question: does inflation make stocks go up? This guide answers that question for public equities (primarily U.S. stocks), explaining the difference between nominal and real returns, the economic and financial channels at work, historical evidence, which sectors and types of stocks tend to benefit or suffer, and practical portfolio responses. Read on to learn where equities fit in an inflationary environment and how to think about risk without taking investment recommendations.

Note on timeliness: As of 2026-01-22, according to Benzinga's Market Overview, large-cap indexes showed modest weakness (Nasdaq -0.66%, S&P 500 -0.38%, Dow -0.29%) while the Russell 2000 reached new highs; sector rotation and commodity/metal moves have been cited as signals relevant to inflation expectations.

Definitions and key concepts

Inflation — measures and types

Inflation is the general rise in prices across an economy. Common measures include the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE). Markets often distinguish headline inflation (all items) from core inflation (excluding volatile food and energy).

There are two broad supply/demand narratives for inflation:

• Demand-pull inflation: higher aggregate demand pushes prices up (e.g., rapid fiscal stimulus, tight labor markets).
• Cost-push inflation: higher input costs (energy, wages, supply-chain disruptions) lift prices even if demand is weak.

Which measure (CPI vs PCE, headline vs core) matters because central banks, investors, and contracts can respond differently to each. For example, the Fed favors PCE as its policy gauge, which affects expected monetary responses.

Nominal vs real stock returns

Nominal returns are the raw percentage changes in stock prices, dividends, or total return. Real returns adjust nominal returns for inflation, reflecting changes in purchasing power.

A simple formula: real return ≈ nominal return − inflation rate (approximation). Investors track real returns because preserving purchasing power is often the long-term objective.

When headlines say the market hit a nominal high, it does not necessarily mean investors’ purchasing power improved — an inflation-adjusted (real) perspective may tell a different story.

Monetary policy, interest rates and the Fed

Central banks use policy rates (e.g., the federal funds rate) and balance-sheet tools to influence inflation and employment. When inflation rises, central banks may tighten policy (raise rates, reduce asset purchases) to bring price pressures under control.

Higher nominal interest rates increase the cost of capital and the discount rate used in valuations. Expectations about the central bank’s response are often as important to markets as current inflation readings, because forward-looking investors price expected policy into asset values.

Theoretical channels linking inflation and stock prices

Earnings pass-through and pricing power

If firms can pass higher input costs to customers by raising prices without losing demand, nominal revenues and earnings may rise with inflation. Sectors with strong pricing power (e.g., certain energy producers or consumer staples with trusted brands) can sustain nominal profit growth when inflation accelerates.

However, pricing power is heterogeneous. Many companies cannot fully pass through costs in competitive markets, leading to squeezed real margins when inflation accelerates.

Discount rates and valuation multiples

Stock prices equal expected discounted future cash flows. Higher inflation typically increases nominal interest rates, which raises the discount rate and reduces present values of future earnings. This effect tends to compress valuation multiples (e.g., price-to-earnings or P/E ratios), especially for long-duration assets whose earnings are far in the future.

High-growth technology firms often have earnings expected further in the future (long duration), making them more sensitive to higher discount rates from rising inflation or tightening monetary policy.

Real-economy effects and profit margins

Sustained high inflation can harm real demand — consumers lose purchasing power and reduce discretionary spending. At the same time, higher wages or raw-material costs can squeeze corporate profits if companies cannot fully raise prices. Thus, inflation can create a trade-off: nominal earnings may rise but real profits and volumes may fall.

Investor behavior and "inflation illusion"

Behavioral effects matter. Investors sometimes mistake nominal revenue or profit growth for real improvements, especially during periods of rising inflation. The so-called "inflation illusion" can lead to overvaluation if market participants fail to adjust for deteriorating purchasing power or rising discount rates. Academic research has investigated whether investors systematically misprice equities in inflationary periods; results are nuanced and period-dependent.

Historical and empirical evidence

Long-run perspective: equities as partial inflation hedges

Over long horizons, stocks have historically outpaced inflation in many developed markets, providing real returns that preserve purchasing power. Long-term equity returns reflect real economic growth plus a risk premium; over decades, that risk premium has tended to exceed inflation, so equities are often described as partial inflation hedges in the long run.

That said, the hedge is not perfect and short- to medium-term outcomes can include substantial real losses during high or volatile inflation regimes.

Studies and models (Fed model, NBER, academic research)

Empirical work is mixed. Some valuation models (e.g., the Fed model) and studies highlight a negative relationship between inflation and P/E multiples, while other research shows the sign and magnitude depend on inflation persistence, expectations, and nominal interest rates.

Notable points from the literature:

• Short-run negative correlation: sudden inflation spikes often coincide with falling real equity returns as discount rates rise and uncertainty increases.
• Long-run resilience: over decades, equities have generally delivered positive real returns, though performance varies by country and era.
• Expectation-driven: much of the market response is driven by expectations of future inflation and monetary policy rather than contemporaneous inflation readings.

The NBER and other academic sources stress that investors are not always "fooled" by inflation — but markets can misprice the interaction of nominal growth and real purchasing power under certain conditions.

Inflation regimes and stock performance

Equities tend to perform differently under varying inflation regimes:

• Low and stable inflation: generally favorable for equities; low discount rates and steady growth support higher multiples.
• Rising but moderate inflation: if earnings growth keeps pace and policy remains accommodative, stocks can still produce positive nominal returns, though valuations may adjust.
• High or accelerating inflation: historically harmful to equity valuations and real returns; central bank tightening and economic slowdown risks amplify negative effects.

Therefore, whether "does inflation make stocks go up" depends heavily on the inflation level, persistence, and how monetary policy responds.

Which stocks and sectors are affected differently?

Growth vs value and duration sensitivity

Growth stocks (long-duration cash flows) are more sensitive to changes in discount rates. Rising inflation that translates into higher interest rates typically compresses valuations for growth firms.

Value stocks or firms with near-term cash flows (short-duration) are relatively less sensitive to higher discount rates and may outperform during inflationary tightening.

Size and capitalization (large-cap vs small-cap)

Large-cap firms often have stronger pricing power, more diversified supply chains, and better access to capital, which can make them more resilient to inflationary shocks. Small-caps may be more vulnerable to higher input costs and financing pressures; they generally have higher sensitivity to credit conditions.

Empirical evidence shows mixed outcomes depending on the inflation episode, but balance-sheet strength and pricing power are recurring determinants of relative performance.

Sector differences (energy, financials, REITs, consumer staples, tech, etc.)

Historically, some sectors tend to fare better in inflationary environments:

• Energy and commodity producers: Often benefit from higher commodity prices; nominal revenues can rise with energy prices.
• Materials and industrials: Can benefit when commodity-driven price rises lift selling prices, though margins depend on pass-through ability.
• Financials (banks, insurers): Banks may gain from steeper yield curves if interest rates rise faster than funding costs; however, credit stress under economic slowdown offsets that benefit.
• Consumer staples: If brands can pass through costs, staples hold up better than discretionary names because demand is less elastic.
• Real Estate Investment Trusts (REITs): Sensitive to rising yields (higher financing costs) but can hedge via rental agreements that adjust for inflation; results vary by lease structure and duration.
• Technology and certain high-growth sectors: Vulnerable to higher discount rates; when the market in early 2026 showed tech lagging while materials and energy gained, that reflected rotation tied to macro expectations.

The Benzinga Market Overview (as of 2026-01-22) highlighted sector rotation: basic materials and energy outperformed while utilities lagged, illustrating how inflation or inflation expectations can shift leadership.

Dividend-paying and income-oriented equities

High-dividend stocks can be hit if inflation raises required yields elsewhere (bonds become relatively more attractive) or if payouts are unsustainable in a rising-cost environment. The real value of dividend income falls with inflation unless dividends grow in nominal terms.

Real yields (dividend yield minus inflation) are a useful metric to assess real income from equities.

Interaction with bonds and other asset classes

Relative attractiveness of equities vs fixed income

When inflation expectations push nominal bond yields higher, fixed income can become more attractive relative to equities, drawing capital away from risk assets and pressuring stock prices. Conversely, when real yields remain low, equities often retain relative appeal.

The interplay is dynamic: if higher yields result from stronger real growth (good for earnings), equities may still do well; if yields rise due to inflation without growth, equities often suffer.

Commodities and inflation-linked instruments

Commodities (energy, industrial metals, agricultural goods) and inflation-linked bonds (e.g., TIPS in the U.S.) commonly serve as direct hedges against inflation. Commodities often rise with input-cost inflation. TIPS provide principal and coupon adjustments tied to inflation measures, protecting real income.

The 2024–2026 period saw notable moves in metals and commodities relative to stocks, signaling shifts in inflation expectations and real-asset demand.

Cryptocurrencies and inflation (brief comparison)

Cryptocurrencies are debated as inflation hedges. Their historical price behavior has not shown consistent, reliable hedging characteristics against inflation. Crypto assets are often driven by liquidity, market sentiment, and adoption dynamics rather than direct inflation-linkage. For investors interested in crypto within the Bitget ecosystem, view cryptocurrencies as a distinct asset class with different drivers than equities and consider platform tools for learning and risk management.

Practical implications for investors

Portfolio construction and diversification

Diversification across asset classes (equities, nominal bonds, inflation-linked bonds, commodities, cash equivalents) helps manage inflation risk. Sector tilts toward commodity-linked or pricing-power companies can be a tactical response, while maintaining long-term strategic equity exposure helps capture the historical equity risk premium.

Bitget users can explore portfolio tools to track allocation and risk exposures, and consider inflation-sensitive instruments where available on the platform.

Time horizon considerations

Time horizon is critical. Over long horizons, equities often beat inflation, but short-term drawdowns and periods of negative real returns can last years. Align allocations with your investment horizon and liquidity needs.

During the earnings season backdrop in early 2026, markets priced forward earnings growth expectations (e.g., consensus EPS growth estimates around 8–15% for parts of 2026), which illustrate how forward-looking corporate profitability can influence whether nominal stock gains translate into real purchasing-power improvements.

Tactical vs strategic responses

Tactical moves: short-term sector rotation, hedging with inflation-linked bonds or commodities, or reducing duration exposure in equity portfolios (favoring value/short-duration names).

Strategic moves: maintaining long-term equity exposure to preserve real purchasing power, diversifying across real assets, and holding a portion of the portfolio in inflation-linked instruments.

Avoid reactive overtrading; base changes on a clear plan and risk tolerance rather than headline inflation prints alone.

Measuring outcomes: nominal gains vs inflation-adjusted gains

Calculating real returns

To compute real returns, adjust nominal returns by the inflation rate. For example, if a portfolio returned 10% nominally while inflation was 4%, the approximate real return is 6%.

Remember CPI or PCE has measurement lags and revisions; choosing which inflation series to use affects the result slightly.

Performance metrics and reporting

When evaluating performance under inflationary conditions, use rolling long-term horizons (5+, 10+ years) to assess real purchasing-power outcomes. Short windows can be misleading because inflationary spikes or policy shocks often cause transient volatility.

Report both nominal and inflation-adjusted returns to provide a complete picture.

Common misconceptions and frequently asked questions (FAQ)

Q: If inflation is rising, should I expect my stocks to rise in price?

A: Not necessarily. Rising inflation can increase nominal revenues if companies pass costs through, but higher inflation often triggers higher nominal rates and compressed valuation multiples, which can lead to lower or volatile stock prices. Whether "does inflation make stocks go up" depends on pass-through, monetary reaction, and investor expectations.

Q: Are stocks always a good hedge against inflation?

A: Over long horizons, equities have historically outpaced inflation in many markets, providing a partial hedge. However, equities are not a perfect or immediate hedge — some inflation regimes produce negative real returns for equities for extended periods, and sector-level outcomes can be dramatically different.

Q: Which sectors benefit most when inflation rises?

A: Commodity producers (energy, materials), certain industrials, and some financials may benefit under rising inflation, while rate-sensitive growth sectors (e.g., long-duration tech) commonly underperform. Outcomes depend on the structure of inflation and monetary response.

Q: Should I switch to commodities or crypto to hedge inflation?

A: Commodities and inflation-linked bonds have clearer historical links to inflation; cryptocurrencies show inconsistent hedging behavior. Consider diversification and risk profiles rather than wholesale switches.

Policy and market implications

Central bank reaction functions and market expectations

Markets are forward-looking. Central bank statements, meeting minutes, and market-implied rates (e.g., fed funds futures) often move markets more than a single inflation print. Where inflation is persistent, central banks may tighten aggressively, which can pressure equities even if earnings appear healthy nominally.

The market commentary in early 2026 raised questions about fiscal and monetary interplay ("fiscal dominance"), which can influence inflation expectations and thus asset pricing.

Structural changes and secular trends

Globalization, supply chains, labor-market shifts, and demographic trends affect the inflation-stock dynamic. For example, supply-chain normalization may lower cost-push pressures, while structural fiscal deficits can support higher long-term inflation expectations.

Investors should monitor structural drivers as they alter how inflation shocks transmit to corporate margins and discount rates.

Summary and practical takeaways

• The simple question "does inflation make stocks go up" has a complex answer: inflation can increase nominal earnings for some firms, but higher inflation usually leads to higher nominal rates and lower valuation multiples which can depress stock prices, especially for long-duration growth companies.

• Over long horizons, equities have historically offered a partial hedge against inflation by delivering positive real returns, but short- and medium-term outcomes are highly variable and depend on inflation severity, persistence, and monetary policy responses.

• Sector and firm-level characteristics — pricing power, balance-sheet strength, and duration of cash flows — determine how a company fares when inflation rises.

• Tactical shifts (sector rotation, inflation-linked bonds, commodities) can protect portfolios in the short run, but strategic allocation and diversification remain central to managing long-term purchasing-power objectives.

• Track both nominal and real returns, use appropriate inflation measures (CPI vs PCE), and keep an eye on central-bank communications since expectations often drive market moves.

Selected references and further reading

Sources cited or used in preparation of this article include research and market commentary from Public Investing (public.com), Moomoo, Investopedia, Bankrate, Heritage Foundation, NBER publications, Betashares, Morningstar, and Hartford Funds / Schroders whitepapers. Market summary data referenced above came from Benzinga's Market Overview (reported as of 2026-01-22).

Notes on recent market context (example data)

As of 2026-01-22, according to Benzinga's Market Overview:

• Major indices: Nasdaq -0.66%, S&P 500 -0.38%, Dow -0.29%; Russell 2000 reached a new all-time high.
• Sector leadership showed basic materials and energy outperforming; utilities lagged.
• Company examples: DigitalOcean (DOCN) reported $229.63 million revenue and $55.99 million in earnings in the latest quarter; valuation metrics included a P/E around 22.13 and Price-to-Sales ~6.07.
• Peabody Energy (BTU) printed $1.01 billion in revenue with $3.23 million in earnings, showing commodity-linked exposure benefits.

These snapshots illustrate how sector rotation and earnings trends interact with inflation expectations and market prices.

Further practical steps and Bitget resources

• For users seeking tools to analyze asset-class exposures or inflation-sensitive instruments, explore Bitget's market research and portfolio-tracking features.

• If you trade or hold crypto and want to monitor macro correlations, Bitget Wallet integrates wallet management and educational resources about how crypto behaves relative to traditional inflation hedges.

• Consider using inflation-linked instruments, commodities exposure, and broad diversification rather than relying on a single asset class. Bitget provides market data and tools to review allocations and historical performance across market regimes.

More to explore: check Bitget’s learning center for guides on portfolio diversification, inflation-linked instruments, and sector analysis to help you understand how shifts in inflation expectations may influence different asset classes and sectors.