Stagflationary Stock Returns

Benjamin Knox and Yannick Timmer

No 2025-056, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study investors’ perceptions of inflation through the lens of a high-frequency event study, documenting they have a stagflationary view of the world. In response to higher-than-expected inflation, investors expect firms’ nominal cash flows to remain stagnant while discount rates increase, resulting in lower stock prices. Both the equity risk premium and nominal risk-free yields rise, but longer-term real yields remain unchanged. Consistent with investors interpreting inflation as a cost shock, investors expect firms with low market power to suffer larger declines in cash flows. Cash flow expectations of equity investors are aligned with those of professional earnings analysts.

Keywords: Inflation; Stock returns; Stagnant cash flows; Market power (search for similar items in EconPapers)
JEL-codes: E31 E44 G12 L11 (search for similar items in EconPapers)
Pages: 82 p.
Date: 2025-08-04
New Economics Papers: this item is included in nep-mac
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https://www.federalreserve.gov/econres/feds/files/2025056pap.pdf (application/pdf)

Related works:
Working Paper: Stagflationary Stock Returns (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2025-56

DOI: 10.17016/FEDS.2025.056

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