counterintuitive effect of inflation stock, why, everything, anything, regarding

laurab

this is regarding the formula for P/E = 1 / r + (1-L)*I from reading 38.
also take a look at question #15 end-of-chapter

the fact that higher inflation causes lower stock price sounds counterintuitive to me.
when we think about prices of anything (groceries, clothing...) -
if inflation is high, then prices of everything are high - so why is it opposite for stock prices .
anyone cares to share their thoughts on this subject

chaojimali

my intuition is the other way round.

when prices of everything are high, including production costs, the inflation is high. everything else equal, less earning and future cash flow.

Also when inflation is high, required rate of return is high and higher risk-- less investors are willing to pay for a riskier cashflow



Edited 1 time(s). Last edit at Saturday, May 14, 2011 at 09:25AM by lzen5.