The Value of Pricing Power When Investors Benchmark to Headline Inflation

Amra Hrustanovic and Alexander F. Wagner

No 21035, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study equity valuation when investors benchmark firms against headline inflation although pass-through varies across firms. In standard valuation, inflation is value-neutral 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: Inflation pass-through; Equity valuation; Tariff shock (search for similar items in EconPapers)
JEL-codes: G12 G32 L11 (search for similar items in EconPapers)
Date: 2026-01
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP21035 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:21035

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP21035

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().