This paper takes a new look at the relationship between stock prices and inflation, focusing in particular on how expected inflation affects expected long-horizon stock returns. The predominant academic view, which continues to be reflected in the literature [see, ., Barnes, Boyd and Smith (1999)], is that high expected inflation predicts low stock returns, a perspective largely based upon the analysis of monthly and quarterly returns. Although this negative inflation effect on returns has been found to be weaker at longer horizons, the short-horizon results have weighed most heavily on the perceptions of financial economists, as evidenced by the variety of efforts aimed at producing.
