Here's another article about how stocks may be a good hedge against inflation.

Consider a study by two Harvard economists, John Campbell and Tuomo Vuolteenaho, who examined the stock market's relationship to inflation and interest rates over the 75 years from 1927 to 2002. See study

They found that, as a general rule, earnings and inflation tended to move up and down together.

What that means: Stocks are a decent hedge against inflation, at least over the intermediate and long-terms.

This is not as counterintuitive as you might think. When inflation is high and rising, companies are able to raise prices and hence fatten their bottom line. By the same token, when inflation is low, firms' pricing power is correspondingly low.

Another way of summarizing the historical record: Real (inflation-adjusted) corporate earnings tend to be relatively stable, while nominal earnings tend to be relatively volatile.

The mistake that investors therefore make is believing that nominal earnings are immune to inflationary pressures, on both the upside and the downside. Economists refer to this mistake as money illusion.

Despite the fears of John Derbyshire, I'm still buying into the falling market.

(See original Equities and Inflation post that mentions Warren Buffet's perspective on how inflation affects stock prices.)

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