The Value of Pricing Power When Investors Benchmark to Headline Inflation

Amra Hrustanovic and Alexander F. Wagner
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Amra Hrustanovic: University of Zurich - Department of Finance; Swiss Finance Institute
Alexander F. Wagner: University of Zurich - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swiss Finance Institute

No 26-05, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study equity valuation when investors benchmark firms against headline inflation although pass-through varies across firms. In standard valuation, inflation is valueneutral even with heterogeneous pass-through if investors use firm-specific inflation. Benchmarking to headline inflation conflates nominal cash-flow growth with real performance and shifts discount rates at inflation announcements. Pricing power shapes both channels by enabling greater pass-through and reducing perceived inflation exposure. Empirically, higher-pricing-power firms exhibit smaller stock-price declines and smaller cost-of-capital increases following inflation surprises. The April 2025 tariff announcement yields similar pricing-power-based return differences. These results offer new insights into inflation's implications for asset pricing and valuation.

Keywords: Pricing power; Inflation pass-through; Equity valuation; Tariff shock; Inflation surprises (search for similar items in EconPapers)
JEL-codes: G12 G32 L11 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2026-01
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2605

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