Why they say stocks are an inflation hedge 🎈

When prices go up, earnings often go up 🤔

Photo by Pesce Huang on Unsplash

You’ll sometime hear that stocks are among the asset classes that can offer a hedge against inflation.

It’s intuitive. When costs go up, companies raise prices to protect their profit margins. In turn, earnings go up with prices, and stocks go up with earnings.

Of course, companies can only raise prices to the degree their customers are willing and able to accept them. When prices get too high, customers stop buying, inventories pile up, margins get squeezed, and profits fall. To address that, companies may be forced to hold or cut prices, which in turn means lower inflation or even deflation.

In many ways, all of this means company pricing actions are both the cause and effect of inflation.

This is not just some crackpot theory.