Conference Agenda

We study the inflation implications for firms across the market power distribution

from an asset pricing perspective. Inflationary surprises are associated with

persistent declines in stock returns. We propose a new decomposition of the present

value identity of stock prices and show that investors expect nominal cashflows to

remain stagnant during periods of higher-than-expected inflation, a stagflationary

view of the world, on average, while a rising equity risk premium reduces stock

prices. Real yields do not increase in response to inflationary news, inconsistent

with a Taylor-rule type monetary policy-driven stock price response. Firms with a

large degree of market power are shielded from the negative returns following inflation

surprises, as market power firms are expected to generate a relative increase

in their nominal cashflows in response to inflation shocks. Changes in analysts’

firm-level earnings expectations around inflationary surprises confirm these results.