Inflation…Does it Affect the Stock Market?

A question that I have received more and more often from clients is “how will high inflation impact the stock market?”  Inflation has definitely been in the news lately, and it can be an alarming thing.   As you can see in the chart below, the inflation rate has increased from 1.2% a year ago, to 5.4% as of last month.  

Predicting the future is a hard thing to do, so I don’t know what the future will hold, but we do know that inflation has already taken a toll on our buying power as consumers.

Inflation’s Impact on the Stock Market

A big narrative in my industry is that high inflation is a bad omen for the stock market.  The problem is, looking at historical data, the numbers don’t really go along with that narrative.   This chart compares the yearly S&P 500 return (Large US Stock Market) to the inflation rate. 

There is no pattern that I can see.  Some high inflation years were indeed negative, but a bunch of them were huge positive years for the stock market.   

If we look into the actual numbers from the highest inflation rate years throughout history, there is further proof that no major correlation exists. 

More than 1/3 of these high inflation years produced a greater than 20% return from the stock market. 

Also, the average stock market return during these years was 9.4%, almost identical to the long term average of the S&P 500.

What not to do during High Inflation

The last thing you want to do with long term money during periods of high inflation, is pull your money out of the stock market, and put it in the bank/cash/CD’s.   Especially now, with interest rates so low, it is challenging to keep up with inflation if your money is just sitting there not really growing. 

The Best Hedge Against Inflation

In my opinion, the best hedge against inflation is to invest in stock based mutual funds that are extremely diversified and ride out any short term volatility.   Is it guaranteed to beat inflation?  No.  But it has a much better chance to beat inflation then a CD at a bank, or pretty much anything else for that matter. 

By Jimmy Hancock


  1. “United States Inflation RATE2021 DATA: 2022 Forecast: 1914-2020 Historical.” United States Inflation Rate | 2021 Data | 2022 Forecast | 1914-2020 Historical,
  2. Posted October 24, 2021 by Ben Carlson. “Inflation vs. Stock Market Returns.” A Wealth of Common Sense, 24 Oct. 2021,