The traditional view that expected nominal rates of return on assets should move one-for- one with expected inflation is first attributed to Irving Fisher (1930). Financial economists have also argued that, because stocks are claims on physical, or “real”, assets, stock returns ought to co-vary positively with actual inflation, thereby making them a possible hedge against unexpected inflation. During the mid to late 1970s, however, investors found that little could be further from the truth; at least in the short and intermediate run, stocks prices were apparently quite negatively affected by inflation, expected or not. The earliest studies mainly document the negative covariation between actual.
