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.