Deflation and Stock and Bond Returns

Overview: With expected inflation rates very low, there will be significant attention on the possibility of deflation causing the stock market to fall. This blog examines the relationship between the rate of inflation and stock and bond returns. Generally, the research shows that stock returns are no lower in deflationary environments than in normal inflationary ones. The research does find, though, that both stocks and bonds have done poorly in high-inflation environments.

Expected inflation rates in the U.S. and elsewhere are very low. Figure 1 shows the average annual expected inflation rates in the U.S. over the next one, three, five, 10, 20 and 30 years.

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