how do stocks do during inflation explained

Stocks and Inflation

Inflation shapes returns across asset classes and influences investor decisions, policy choices and corporate strategy. In this guide we answer the question how do stocks do during inflation by combining theory, historical evidence and practical portfolio implications. Readers will learn key definitions (CPI vs PCE, nominal vs real returns), why some sectors weather inflation better than others, how monetary policy alters outcomes, and what tactical and strategic responses investors can consider while avoiding market-timing traps.

As of March 2025, according to US market session reports, major indices opened with broad-based gains in a session that reflected stabilizing bond yields and positive economic indicators. As of July 2025, market reports show the US 10-year Treasury yield rose to about 4.27%, a reminder of how interest-rate moves can quickly affect risk assets and valuations.

Note: this article focuses on equities (publicly traded stocks). It is informational, not investment advice. When referring to trading platforms or wallets, readers interested in execution or custody may consider Bitget and Bitget Wallet for exchange and custody services.

Definitions and key concepts

What is inflation?

Inflation is a sustained increase in the general price level of goods and services over time. Common measures include the Consumer Price Index (CPI) and the Personal Consumption Expenditures price index (PCE). CPI measures out-of-pocket consumer prices, while PCE captures broader spending patterns and is the Federal Reserve’s preferred gauge in the United States. Inflation can be measured monthly or annually and is typically quoted as a year-over-year percentage change.

Real vs nominal returns

Nominal returns are the percentage gains (or losses) reported before adjusting for inflation. Real returns subtract inflation from nominal returns and reflect changes in purchasing power. For investors the real return matters because a high nominal return can still be a loss in purchasing power if inflation is higher. For example, a 6% nominal equity return in a 4% inflation environment equals roughly a 2% real return.

Types of inflation

Not all inflation is the same. Common categories include:

• Demand-pull inflation: occurs when demand outstrips supply (strong growth, rising wages, excess demand).
• Cost-push inflation: input costs (like energy or wages) rise and firms either absorb them or pass them to customers.
• Supply-shock inflation: a sudden supply disruption (e.g., commodity shock, geopolitical disruption) that pushes prices higher.

The cause of inflation matters for stocks because policy responses and corporate pricing ability differ by type.

Theoretical links between inflation and stock prices

Discounting and present value of future cash flows

Equity valuations depend on expected future corporate cash flows discounted back to present value. Higher inflation often leads to higher nominal interest rates and higher discount rates. For stocks with cash flows far in the future (high-duration or growth stocks), an increase in discount rates reduces present value more sharply than for firms with near-term cash flows. This is a primary reason growth stocks can underperform when inflation and yields rise.

Profit margins and pricing power

Inflation raises input costs (materials, wages, energy). Companies with pricing power—those that can raise prices without losing customers—can preserve or even expand margins during inflation. Firms selling essentials, differentiated products, or operating in oligopolistic markets often have stronger pricing power. By contrast, highly competitive, price-sensitive businesses with low margins struggle to pass through costs.

Monetary policy responses

Central banks generally tighten monetary policy (raise interest rates) to combat persistent inflation. Higher policy rates increase borrowing costs, slow economic activity and depress valuations by raising discount rates. The timing and pace of policy tightening, and whether it is expected or unexpected, are crucial for equity market reactions.

Real assets and earnings linkage to prices

Some companies have revenues that move with nominal prices—commodity producers, certain utilities with inflation-linked contracts, and firms with pricing tied to inflation can partially hedge equity holders against rising prices. Real assets (e.g., parts of real estate, natural resources) can provide some inflation linkage through rents or commodity prices.

Empirical historical evidence

Long-run evidence: equities as an inflation hedge

Over long investment horizons, equities have generally preserved and grown real purchasing power better than cash or nominal bonds. Multiple long-run studies find that stocks delivered positive real returns across many decades, helping investors maintain purchasing power. That said, this result averages across varied inflation environments and does not guarantee positive real returns during every high-inflation episode.

Short- and medium-term evidence: volatility and negative real returns in high-inflation regimes

In the short to medium term, periods of rising or unexpectedly high inflation often coincide with higher stock-market volatility and episodes of negative real equity returns. Elevated inflation can compress profit margins and prompt faster-than-expected rate hikes, which can drive market drawdowns. Empirical work shows that unexpected inflation surprises produce negative returns for equities, particularly when inflation is well above central bank targets.

Inflation regimes and observed outcomes

Historical patterns show nuance: moderate inflation (roughly 1–3% historically, depending on country and era) has typically accompanied healthy corporate earnings and reasonable equity returns. By contrast, very high inflation (e.g., >6–10% sustained) has frequently produced poor real returns, heightened volatility and economic disruption. The 1970s in many advanced economies are a canonical example of prolonged high inflation with weak equity performance in real terms.

Cross-sectional effects — which stocks and sectors perform differently

Value vs. growth

One robust observation is that value-style stocks (lower price-to-earnings or lower valuation multiples, often with nearer-term cash flows) have historically outperformed growth-style stocks during higher-inflation or rising-rate regimes. The rationale is that value firms have lower duration exposure and their cash flows are realized sooner, so rising discount rates hurt them less. Growth stocks, priced on distant expected growth, are more sensitive to rate changes.

Sector differences

Sectors that historically fare relatively better in higher inflation or rising-rate environments often include:

• Energy and materials: commodity-linked revenues can rise with inflation.
• Financials: higher interest rates can boost net interest margins for banks (though rapid or yield-curve inversions create risks).
• Certain industrials and basic materials: pricing power or exposure to commodity cycles can help.

Sectors that often underperform are those with long-duration cash flows and heavy reliance on future growth assumptions, for example many technology and discretionary growth firms. Real estate investment trusts (REITs) and some real-asset stocks can be mixed—real estate with short-term rent resets or inflation-linked leases can help, but highly leveraged REITs can suffer when financing costs spike.

Company-specific factors

Beyond sector labels, company-level characteristics matter greatly:

• Pricing power and brand strength
• Input-cost exposure and ability to hedge commodities
• Financial leverage (high debt is riskier when rates rise)
• Balance-sheet strength and liquidity
• Contract structures (fixed vs inflation-linked revenues)

These factors determine whether a given stock is resilient or vulnerable when inflation rises.

Time horizon and investor perspective

Short-term market reactions

Markets often react negatively to unexpected inflation prints because such surprises force a rapid reassessment of both monetary policy and corporate margins. Short-term selling can be broad-based and intense, especially if inflation surprises are large or persistent.

Long-term investor outcomes

For long-term equity investors who can tolerate interim volatility, equities have historically been one of the better assets for preserving real wealth, as earnings and dividends tend to grow with nominal GDP and prices over decades. However, long-term outcomes depend on entry valuations and the duration of inflationary regimes.

Portfolio implications and strategies

Sector & style tilts

Investors considering exposure adjustments during inflationary periods often look at tilts such as favoring value over growth, increasing allocations to energy or materials, and overweighting financials where appropriate. Quality businesses with pricing power, strong cash flow conversion and low leverage are commonly preferred within equity allocations.

Diversification and hedges

No single asset perfectly hedges inflation. Common hedging options include:

• Inflation-linked bonds (e.g., TIPS) to protect real principal.
• Commodities or commodity-focused equities to capture price appreciation in raw materials.
• Real assets (real estate equity with inflation-linked rents, infrastructure).
• Select equity sectors and dividend-growth stocks.

Be mindful: nominal bonds often perform poorly when inflation rises unexpectedly because yields increase and prices fall. That reduces the traditional stocks-plus-bonds diversification benefit in tight inflation-tightening episodes.

Income and dividend considerations

Dividend-paying companies, especially those with a track record of dividend growth, can offer rising nominal income that helps offset inflation’s erosion of purchasing power. However, if dividends are cut due to squeezed margins, the protective effect can fade. Dividend coverage ratios and payout sustainability remain important.

Risk management and position sizing

Rather than attempt to time inflation, many investors prefer measured adjustments: prudent position sizing, rebalancing to target allocations, and focusing on balance-sheet resilience and valuation discipline. Tactical moves can be appropriate for experienced investors who have strong process and risk controls.

Caveats and important modifiers

Source of inflation matters

Outcomes differ if inflation stems from strong demand (demand-pull) versus supply shocks or cost-push dynamics. Demand-driven inflation often coexists with stronger earnings growth, which can mitigate equity losses, while supply-driven or stagflationary episodes (high inflation plus low growth) are particularly damaging to equities.

Valuation starting point and expectations

How expensive markets are before inflation rises affects the magnitude of any correction. High starting valuations increase the sensitivity of equities to rising discount rates.

Interaction with growth and recession risk

Inflation combined with slowing growth (stagflation) tends to be the worst-case scenario for stocks. By contrast, moderate inflation that accompanies robust growth is usually less harmful.

Country and market differences

Emerging-market equities can respond differently to inflation than developed-market stocks because of varying monetary frameworks, currency risks and commodity exposures. Investors should consider regional dynamics and local inflation measurement quirks.

Special topics and recent experience

The 1970s and lessons from historical high-inflation episodes

The 1970s showed how prolonged, high inflation with policy uncertainty can produce volatile and often negative real returns for equities. Investors learned the importance of valuations, flexible asset allocation, and the value of assets with price linkages to inflation.

The 2021–2023 inflation episode and the 2025 context

From 2021 into 2023, a combination of pandemic-era supply disruptions, fiscal stimulus and strong demand produced elevated inflation in many economies. Central banks tightened policy in response, and equities experienced heightened volatility and sector rotations—particularly challenging for long-duration growth stocks.

As of March 2025, market session reports noted instances of broad-based gains when inflation indicators appeared to moderate and bond yields stabilized. However, by July 2025 market reports recorded that the US 10-year Treasury yield reached around 4.27%, a reminder that yields and inflation expectations remain critical drivers of equity performance.

When stocks and bonds fall together

During certain inflation-tightening episodes, both stocks and nominal bonds can decline simultaneously as rising yields push bond prices down and repricing of growth expectations hits equities. This correlation breakdown reduces the protective value of traditional 60/40 portfolios and increases the importance of inflation-aware diversification.

Practical guidance for investors

Long-term investors

• Maintain diversified equity exposure across sectors, geographies and styles.
• Favor companies with pricing power, durable competitive advantages and strong balance sheets.
• Rebalance periodically to avoid drift and to capture disciplined buying/selling.
• Avoid attempting to time inflation spikes; focus on long-term asset-allocation objectives.

Tactical considerations for shorter-term investors

• Monitor sector rotations: consider relative exposure to value, financials, energy and materials if inflation is rising and rates are climbing.
• Use inflation-protecting instruments (TIPS, commodities, real-asset exposures) for targeted hedges.
• Keep position sizing and stop-loss discipline to manage drawdown risk.

Monitoring indicators

Key macro and market indicators to follow:

• CPI and PCE inflation prints (headline and core measures)
• Wage inflation and unit labor costs
• Producer Price Index (PPI)
• Real yields and nominal Treasury yields (especially 2- and 10-year notes)
• Yield-curve shape and credit spreads
• Central bank communications and meeting minutes

Research and data sources

Analysts and investors studying how do stocks do during inflation typically use:

• Historical return databases (decades-long equity return series)
• Factor and sector performance decompositions (value vs growth; sector-level returns)
• Macro time series (CPI, PCE, wage growth, real activity measures)
• Bond-market indicators (yields, break-evens, inflation swaps)
• Industry/asset-manager research and academic studies for robustness checks

References

Sources informing this analysis include Investopedia (inflation and stock-return research), IG (market primers), Bloomberg/iShares research on value vs growth in inflationary regimes, Hartford Funds and Capital Group sector insights, J.P. Morgan Private Bank notes on inflation shocks and portfolio defense, A Wealth of Common Sense commentary on value stocks and inflation, Morningstar discussions of dividends and inflation hedging, and Bankrate surveys of bond and stock behavior in higher inflation. Readers are encouraged to consult those original reports for charts, methodologies and full data tables.

Reporting dates and market context

• As of March 2025, US market session summaries reported coordinated opening strength across the S&P 500, Nasdaq Composite and Dow Jones Industrial Average driven by stabilizing yields and positive economic indicators. (market session reports, March 2025)
• As of July 2025, market reports noted that the US 10-year Treasury yield rose to about 4.27%, illustrating how yield moves can pressure risk assets including equities and digital assets. (market reports, July 2025)

Final notes and next steps

When asking how do stocks do during inflation, the short answer is: it depends. Over long horizons equities have historically preserved real purchasing power, but in the short and medium term rising or unexpected inflation often raises volatility and can produce negative real returns—especially when inflation is high, persistent, or accompanied by slowing growth.

For readers wanting to act on these insights: maintain a disciplined, diversified approach; pay attention to company fundamentals (pricing power, leverage, cash flow); and use targeted hedges if needed (TIPS, commodities, real assets). If you trade or custody assets, Bitget and Bitget Wallet can be considered for execution and custody services. To dive deeper, consult the industry reports referenced above and monitor CPI/PCE, real yields and central bank communications regularly.

Explore more Bitget educational resources to understand how macro forces like inflation interact with market structure and product choices.

References (selected)

• Investopedia — Inflation's Impact on Stock Returns
• IG — How Does Inflation Affect the Stock Market and Share Prices?
• Bloomberg / iShares — Positioning for Inflation: The Historical Outperformance of Value Stocks
• Hartford Funds — Which Equity Sectors Can Combat Higher Inflation?
• Public Investing — How does inflation impact the stock market
• J.P. Morgan Private Bank — Beyond bonds: How to protect against inflation-led shocks
• A Wealth of Common Sense — Value Stocks Like Higher Inflation
• Capital Group — Equity investing in an inflationary environment
• Morningstar — Are Stocks a Good Hedge Against Inflation?
• Bankrate — How Inflation Affects The Stock Market