How does inflation affect the stock market?

By Frank Grinnell

Most people know that inflation increases the cost of everyday goods like food, gas and groceries, but it affects virtually every aspect of the economy, including investments. Making the wrong moves during an inflationary period can be costly, but the right investments can help investors protect their assets and hedge against inflation.

What is inflation?

Inflation is a rise in the average cost of goods and services. The U.S. Bureau of Labor Statistics reports the Consumer Price Index (CPI), a measure of the average change over time in the prices paid by urban consumers for goods and services, such as gasoline, food, clothing and cars. It is based on a survey about what households are buying.

Another measure is the Personal Consumption Expenditures Price Index (PCE). It measures the prices that people living in the U.S., or those buying on their behalf, pay for goods and services and is determined by a survey about what businesses are selling. It is reported by the Bureau of Economic Analysis, part of the U.S. Department of Commerce. The PCE tends to measure inflation lower than the CPI.

Is the U.S. experiencing inflation?

According to the labor department, for the past decade, inflation has averaged under 2% per year. In October 2021, the labor department reported a year over year increase of 6.2%, the fastest pace since 1990. Excluding food and energy, the same measure is 4.6%.

Some experts say this period of inflation is “transitory,” or temporary as the global market recovers from the COVID-19 crisis. Others say there is no end in sight to the current supply chain and other issues that are causing a hike in prices. For now, inflation does not seem to be slowing down. It jumped 0.9% from September to October, which is higher than the previous month’s increase of 0.4%.

What is causing rising inflation?

There could be several events causing inflation, one of which is the COVID-19 economic recovery. The recent surge in demand for consumer goods, especially in e-commerce, spurred by the pandemic far outstrips the market’s capacity to produce. These issues are further exacerbated by supply chain disruptions, especially in Asia. The severe global shortages of drivers and other workers make it difficult to transport goods.

The labor shortage, in general, has pushed wages upward. Finally, new and used car shortages and rent hikes have contributed to this inflationary period.

How does inflation affect the stock market?

The market expects an annual inflation rate of 2%. When it suddenly changes, the market reacts negatively. For example, if investors expect a return of 6% per year after inflation, they will expect an 8% return each year. With a 2% increase in inflation, the rate of return would also have to increase by 2% to produce the same real rate of return. Stock prices can drop during inflation because the real rate of return drops.

However, during an economic boom, inflation causes a different reaction than inflation during a recession. Stocks react more negatively to inflation when the economy is contracting than when it is booming. When the economy is expanding, as it is now, it can withstand a higher rate of inflation without jeopardizing revenues, profits, and stock prices.

How does inflation affect stock investments?

According to analysis performed by the U.S. Bank Asset Management Group, stocks have held up well against inflation over the last 30 years. Stocks of larger companies tend to fare better than mid-sized companies, and mid-sized companies have a stronger relationship with inflation than smaller companies.  Commodities like energy and oil, as well as Growth at a Reasonable Price (GARP) stocks, tend to fare better during inflationary periods. GARP stocks have histories of strong earnings growth and impressive earnings prospects, are priced below the market and have a strong return on equity.

On the other hand, foreign stocks tend to fall in price in an inflationary environment. Companies with a lot of debt fare significantly worse in high inflation because these companies will have to seek more expensive capital in the future. Lastly, companies with high valuations at an early stage in their lifecycle tend not to perform as strongly in times of inflation.

How does inflation affect other investments?


Inflation decreases the buying power of your savings, even if funds are secured in a savings account with an average interest rate. The interest rate is unlikely to keep pace with inflation, which effectively diminishes savings’ buying power and value over time.

Bonds, treasuries and CDs

As the rate of interest payments remains the same on fixed income securities until maturity, the purchasing power of interest payments declines as inflation rises. Especially for long-term bonds, the cumulative impact of lower purchasing power for cash received far in the future drags bond prices down.

Real Assets

Commodities can be a reliable way to hedge against rising inflation. The value of real estate and commodities tends to correlate with inflation positively. Property owners can increase rent payments when the prices of goods and services rise, increasing profits and investor distributions.

How can I defend my portfolio from inflation?

Inflation can significantly impact on your portfolio over time, but investors can take steps to help protect their investments against inflation. Diversifying your portfolio with exposure to U.S. stocks and real assets such as commodities may help you shield your money against inflation. At Grinnell Capital, the Accelerator Model gains exposure to commodities through investments in mining companies.

Investors can also consider Treasury inflation-protected securities (TIPS). The rate of return on TIPS, issued by the U.S. government, is adjusted in accordance with the CPI. These can result in a somewhat more reliable performance than other types of bonds and asset classes.

Finally, an investment in a small number of high-conviction stocks across a variety of sectors can be an effective way to protect and grow assets during an inflationary period.

If you are interested in an investment product managed by an experienced portfolio manager with risk-adjusted terms, contact us.

About Grinnell Capital

Grinnell Capital is an investment management firm founded by Frank Grinnell and Dana Grinnell, a team with over 40 years of combined experience in investment management, business ownership, and executive leadership. 


We aim to simplify investing through two distinct products: the Accelerator Model and the Ignition Model.


The Accelerator Model is a concentrated portfolio of inefficiently priced and disruptive companies poised for growth that are selected using a disciplined, fundamentally-driven investment process underscored by stringent risk controls.

The Ignition Model is a portfolio of ETFs designed to provide sector-specific exposure and capitalize on market trends.

By providing a simplified approach to investing, we endeavor to help our investors live confidently. Contact us to learn more about Grinnell Capital.

Grinnell Capital is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. For additional information about Grinnell Capital, including its services and fees, please review the firm’s disclosure statement as set forth in Form ADV and is available at no charge at

This information is provided for informational purposes only. The information contained herein should not be construed as the provision of personalized advice and is subject to change without notice. This material should not be considered as a solicitation to buy or sell any asset or engage in a particular investment strategy. Investing in securities involves the risk of loss, including loss of principal invested, and may not be suitable for all investors. Past performance is no guarantee of future results.

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