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Inflation and Asset Returns

Author

Listed:
  • Anna Cieslak

    (Fuqua School of Business, Duke University, Durham, North Carolina, USA)

  • Carolin Pflueger

    (Harris School of Public Policy, University of Chicago, Chicago, Illinois, USA)

Abstract

The past half-century has seen major shifts in inflation expectations, how inflation comoves with the business cycle, and how stocks comove with Treasury bonds. Against this backdrop, we review the economic channels and empirical evidence on how inflation is priced in financial markets. Not all inflation episodes are created equal. Using a New Keynesian model, we show how “good” inflation can be linked to demand shocks and “bad” inflation to cost-push shocks driving the economy. We then discuss asset pricing implications of “good” and “bad” inflation. We conclude by providing an outlook for inflation risk premia in the world of newly rising inflation.

Suggested Citation

  • Anna Cieslak & Carolin Pflueger, 2023. "Inflation and Asset Returns," Annual Review of Financial Economics, Annual Reviews, vol. 15(1), pages 433-448, November.
    • Handle: RePEc:anr:refeco:v:15:y:2023:p:433-448
    DOI: 10.1146/annurev-financial-110921-104726
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    Citations

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    Cited by:

    1. Philip Schnorpfeil & Michael Weber & Andreas Hackethal & Michael Weber, 2024. "Inflation and Trading," CESifo Working Paper Series 11580, CESifo.
    2. Diego Bonelli & Berardino Palazzo & Ram S. Yamarthy, 2025. "“Good” Inflation, “Bad” Inflation: Implications for Risky Asset Prices," Finance and Economics Discussion Series 2025-002, Board of Governors of the Federal Reserve System (U.S.).
    3. Ceballos, Luis & Ng, Oscar, 2024. "Do investors care about inflation risk? Evidence from global bond portfolio allocation," Economics Letters, Elsevier, vol. 243(C).
    4. Schnorpfeil, Philip & Weber, Michael & Hackethal, Andreas, 2024. "Inflation and trading," CFS Working Paper Series 727, Center for Financial Studies (CFS).
    5. Jonathon Hazell & Stephan Hobler, 2024. "Do Deficits Cause Inflation? A High Frequency Narrative Approach," Discussion Papers 2439, Centre for Macroeconomics (CFM).

    More about this item

    Keywords

    inflation; risk premia; bond return predictability; stagflation; monetary policy;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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