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Inflation and Asset Returns

Author

Listed:
  • Anna Cieslak
  • Carolin Pflueger

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 in a New Keynesian model, we show how “good” inflation can be linked to demand shocks and “bad” inflation to supply 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," NBER Working Papers 30982, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30982
    Note: AP ME
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    Citations

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    Cited by:

    1. Michael D Bauer & Carolin E Pflueger & Adi Sunderam, 2024. "Perceptions About Monetary Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 139(4), pages 2227-2278.
    2. Jonathon Hazell & Stephan Hobler, 2024. "Do Deficits Cause Inflation? A High Frequency Narrative Approach," Discussion Papers 2439, Centre for Macroeconomics (CFM).
    3. Stefania D'Amico & Thomas B. King, 2023. "One Asset Does Not Fit All: Inflation Hedging by Index and Horizon," Working Paper Series WP 2023-08, Federal Reserve Bank of Chicago.
    4. Schnorpfeil, Philip & Weber, Michael & Hackethal, Andreas, 2024. "Inflation and trading," SAFE Working Paper Series 419, Leibniz Institute for Financial Research SAFE.
    5. François Gourio & Phuong Ngo, 2024. "Downward Nominal Rigidities and Bond Premia," Working Paper Series WP 2024-09, Federal Reserve Bank of Chicago.
    6. Philip Schnorpfeil & Michael Weber & Andreas Hackethal & Michael Weber, 2024. "Inflation and Trading," CESifo Working Paper Series 11580, CESifo.
    7. 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.).
    8. Ceballos, Luis & Ng, Oscar, 2024. "Do investors care about inflation risk? Evidence from global bond portfolio allocation," Economics Letters, Elsevier, vol. 243(C).
    9. Schnorpfeil, Philip & Weber, Michael & Hackethal, Andreas, 2024. "Inflation and trading," CFS Working Paper Series 727, Center for Financial Studies (CFS).

    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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