Inflation makes my money worth less, but stocks aren't money: They're a product that's worth money. If inflation makes prices rise, then does it follow that inflation will also increase the value of my stocks?
Stocks are not products, they are shares of companies. If the companies are expected to perform well, stock prices are high. If they are expected to perform bad, stock prices are low. If a company was expected to perform well but is now expected to perform worse, the stock price will fall.
This is where inflation can come in. While inflation is typically measured on the level of consumer goods ("consumer price index"), the price of raw materials and labor tends to increase as well. This increases the production costs of companies. Their earnings will only increase if they are able to increase the price of their products to match the increase in cost. The ability to push higher prices to the customers can vary a lot between companies.
Stocks aren't products, they are assets.
In either case their prices DO tend to go up with inflation just like any other asset. However, I wouldn't say they benefit from this any more than owning any other asset. For example: if the stock price hypothetically doubled in price because of inflation and the dollar was worth half as much, did you really benefit?
Caveat: Also just like other assets, inflation does not equally affect all stocks. So your results will vary based on the individual companies or industries.
Some companies can react to inflation by raising their prices but many cannot, especially those that compete in a global market where others don't have to raise prices due to inflation.
Inflation erodes purchasing power since wages do not keep up with inflation, consumers purchases fewer goods. Many companies cannot raise prices to offset their increased costs and therefore they have to sacrifice profit in an attempt to maintain sales and avoid a significant decline in profit. It's a no win situation and share price tends to decline.
To fight inflation, the Fed raises rates and this too adds to corporate costs. Dividends do not keep up with inflation, further exacerbating this cycle - dividend stocks suffer - as well as cyclical stocks.
It's a far more complex problem than just saying that share price will increase because company products are higher priced.
On the whole, averaged across all stocks and smoothing out over recessions, they do.
But shares in individual companies are another matter. The value of the shares in any one company depends on the fortunes of that company, and can go up or down independently of anything else. The effect of inflation can get lost in the noise.
Stock Value is Future Profits - By Definition
In theory, the stock price is exactly equal to the sum of all future profits, discounted by time (a dollar today is worth more than a dollar 10 days from now, because I can spend it today).
Things are complicated in the real world because no one can accurately predict future profits. Everyone in the markets tries their best, and the stock price you see on the ticker is everyone's estimates averaged together.
Future Profit is in Future Dollars
Stocks don't necessarily feel inflationary pressures, because the expected value of future profits doesn't necessarily change.
A company's total value is the same, whether you discuss it in dollars or yen. But the number you use in your discussion is very different. Inflation is just treating future dollars like a foreign currency.
If inflation impacts the underlying profitability of the company, then the stock value should change. If inflation leads to labor or material shortages, then obviously you can say that inflation has effected the stock price.
But in general, stock prices aren't negatively impacted by inflation.
If inflation makes prices rise, then does it follow that inflation will also increase the value of my stocks?
No it does not. Will the company that you have invested perform better or worse in a high inflation environment? This COVID related inflation, is pushing the United States into a inflation level that we haven't seen in 30 years. The question is how long will this spike last. That 1990 spike was during the buildup to the first gulf war. The recession didn't last long. How long will this one last?
How will your investment perform? Nobody knows. The way they perform could depend on their sector of the economy, and how consumers and other industries view their products.
Remember investing in stocks is not like putting your money in a bank. You can lose money.
A lot of excellent answers, but you can cut through a lot of the complications. Here are my two answers. Which one is correct depends on which specific definition of inflation you are using.
The answers can be summarized as: "They do benefit, because rising stock prices is exactly the same as inflation" and "They don't because we define it away".
In fact, we have had dramatic inflation in the stock market for several decades, and stocks benefited from it (but see the third section below about that part).
Inflation is the increase in prices for the same underlying items. Notably, inflation is not evenly distributed across all markets - you may see dramatic housing inflation or inflation in medical costs, and no inflation at all in, say, groceries. That's the situation we had for several decades.
If you look at it this way, inflation in the stock market is simply another word for a rising stock market.
Also, the mechanism behind rising stock prices is exactly the same mechanism as behind inflation in other markets: more people have money available, and are interested in, buying stocks than people willing to sell.
Update: after discussing this with @quid in the comments below, there is a somewhat different way of looking at stocks. One can reasonable view them (in this context, not generally) not as a share of a company, but as an entitlement to a fraction of future earnings of that company. In that view, inflation would not be simply the increase in stock price, but rather the increase in the price/earnings ratio.
It does not fundamentally change my answer, because P/E ratios have also dramatically increased over the last several decades.
Despite what I said above, one can also reasonably argue that stocks don't benefit from inflation.
This is because when we talk about inflation, we usually talk about a specific type of inflation: the CPI, or Consumer Price Index. However, the CPI does not measure the prices of everything; it only looks at a basket of goods that consumers typically buy. Stocks are excluded (as well as a lot of other things).
Which of these two answers is correct depends on exactly which definition of inflation you are using.
The question itself is problematic
You asked why stocks don't "benefit" from inflation. The question itself is problematic, because you have to define what you mean by "benefit". I am assuming that you are talking about rising stock prices, since that is generally considered a positive, whether or not that's justified.
That's indeed a benefit for anybody who owns stock (really, just for anybody who wants to sell it), but it is the opposite for somebody who wants to buy stocks.
It's simple really... Inflation reduces confidence in the stability of the market. If investors lose confidence, stocks tend to lose value or stagnate at best. Then again, I never studied economics and don't invest in the market myself. But this seems like a common-sense issue, not requiring a deep dive into the science of world markets.
As mentioned above, stocks are claims on the net assets of a business. They are not a product.
From research, dividends tend to move on a lagged basis with inflation. They tend to run about six months behind changes due to inflation. They also tend to move about one-to-one with inflation over time. A three percent increase in inflation tends to result in a three percent dividend increase.
Because wages also move one-to-one with inflation, wage-related costs go up as well.
How a specific firm is impacted by inflation depends in part on its debt structure. A firm with a three percent fixed rate date due in twenty years makes bank in a six percent inflation environment, all other things being equal.
For the shareholders to get extra profit, the firm has to be able to pass on increases in costs and demanded profits. That is not always the case.
A firm whose primary expense is salaries and interest that holds a lot of variable rate debt will see its costs rise at least as fast as inflation.
Firms in perfectly competitive markets where cost increases cannot be passed on will see a reduction in capacity and quite possibly in the number of firms. High costs firms may shutter their doors.
Finally, high inflation carries an extra information cost. If you saw your firm had a large increase in sales, it could be because the price of your goods did not rise enough and so became cheap by comparison. It could also be due to a change in preference for your products over others due to features and so forth. Do they like your new features or are you mispriced?
One calls for a simple price change. The other requires engineers to look at the products, possibly at high expense. Inflation adds noise and provides nothing in exchange. That can make a firm less valuable.
The inflation hedge is with the dividend. It is not with the price. Inflation can reduce or increase prices.
The top rated answer is problematic to me.
First, all companies borrow money to operate. That means they are on debt. If money becomes worth less, they actually pay less on their debt! On the other hand, CPI (the inflation that you actually feel) indicates the average price of a basket of selected goods. If CPI goes up, that means the companies are charging you more than before, and that is profit!
Second, Manziel says something like "the price of ... labor tends to increase ..." Do you really believe in that? Employees' wages and salaries are quite fixed, or rigid. Look at how much the minimum wage in the states has increased over the past decades. Do you think it catches up with the inflation rate? NO!
Finally, what do you do when you realize that your money is being worth less over time? You tend to spend it right? You are worried that today's 1 buck becomes 80 cents tomorrow right? There you go. The money that consumers' spend is, PROFIT! at a HIGHER price!