Stocks and Inflation – It’s all about the interest rate

The extensive support measures in the wake of the corona pandemic could lead to higher inflation rates in the long term. In such an environment, shares are considered an attractive asset class. Rightly so?

From an investor's point of view, the question arises as to which investment strategy should be used to counteract a depreciation of money. Fixed-interest investments do not seem very attractive when inflation rates rise, if rising prices do not result in rising interest rates. However, rising interest rates on fixed-term deposits or coupons for bondholders can also be accompanied by losses in real value. The recent rally in the price of gold could reflect a loss of confidence in paper money that has begun in anticipation of rising inflation rates. However, if interest rates rise along with inflation, the opportunity cost of holding gold also rises, as it cannot pay coupons or dividends. For this reason, in addition to real estate, equities are often seen as a suitable instrument with which it should be possible to preserve one's assets even in times of high inflation.

In the context of the present study it will be investigated which empirical correlation exists between the development of the stock markets and inflation under consideration of the interest level. For this purpose, historical stock market returns within different inflation phases will be examined in the further course.

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