1

Let's say there's a company in a normal, rational market with X outstanding shares valued at $100 per share in 2021. A year from then, there has been no news about the company, no changes in revenue or staffing, nor any dividends or new shares, so it should be valued the same. Inflation of 2% has occurred between 2021 and 2022. Will the stock then rationally be worth $102?

2

Will the stock then rationally be worth $102?

No. If there's no change in revenue, it means the purchasing power of the revenue is decreased, its nominal value being the same. The stock will be worth $100.

However, most companies see increased revenue in an environment having inflation. Even if the real value of the revenue is the same, its nominal value will increase due to inflation.

Most companies also benefit from GDP growth.

So, a typical stock worth $100 now will be worth $104 - $105 a year from now, mainly because of 2% inflation increasing revenue, but also 2-3% economic GDP growth increasing revenue even more.

1

The value if a company is the present value of all future cash flow. So if all else is equal, then there would be no change in share price. It's possible that an unexpected change in inflation could change the discount rate, but since inflation is typically priced into stocks anyway, there would be no change in stock price just because inflation occurred.

Think about it this way: If a company earns the same nominal amount year after year after year, the real value of that revenue would decline as a result of inflation. So you would not expect the value of the stock to rise with inflation.

2
  • On the other hand, inflation means the company is earning more if it's selling the same products (roughly speaking) – user253751 Jul 7 '20 at 10:53
  • @user253751 True, but the premise was "no changes in revenue". If that means no change in inflation-adjusted terms, then yes the stock price would rise based on inflation. – D Stanley Jul 7 '20 at 12:16
1

There is zero direct connection between inflation in your country and a generic stock. There are some companies that have portions of their business that operate well in a high inflation environment, and those that operate better in a low inflation environment. But that doesn't mean that all stocks do this.

The cause of the inflation can even influence how a specific stock will do. If the bulk of the inflation is due to the energy sector, that can impact producers of energy, suppliers of equipment for energy production, and heavy users of energy differently. Of course if a drop in energy prices is lowering the inflation rate while other parts of the basket are rising, those same producers, suppliers, and users will react differently.

If the experts predict that the inflation rate going forward will be x% this year, that doesn't automatically mean that the stock you are interested will also increase in price by that amount. It depends on what the current and potential investors expect the company to do in the future.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.