How Inflation Affects the Stock Market

The Small Investor

How does inflation affect the stock market?  Inflation is probably the last thing on people’s minds right now.  While gas and food prices were soaring a couple of years ago, gas has settled into a higher but relatively stable price and talk of deflation is all around.  The cost-of-living increase for Social Security was even set at 0% for this year since there was no inflation last year. 

The Federal Reserve, however, has been flooding the economy with dollars to try to prevent deflation and they indicated recently that they would be willing to start causing inflation to get things moving, perhaps as much as 2% per year.  Flooding the economy with lots of dollars that no one wants, however, may spark off a fire storm that they are not expecting (the economy is like the Titantic and the Fed has a dramatically undersized rudder – it does not turn on a dime). …

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