When there are talks of high inflation, you may begin to wonder how it will impact the markets. It may be easier to comprehend how inflation affects prices at the grocery store or airline tickets–but what about your stock portfolio? For instance, you may have a good idea of how a recession can affect the stock market, but have questions when it comes to inflation’s impact on share performance.

We can take a look back at historical instances of how the stock market responded to high inflation as a good gauge of what to expect in the period ahead. This resource will also prove invaluable in the future as inflation ebbs and flows. Plus, we will discuss some of the options investors have to hedge against rising inflation. So, continue reading for a deeper dive into this topic as we answer–what does inflation do to the stock market? First up is a definition of inflation:

What Exactly Is Inflation?

First, let’s begin by defining what inflation is. Inflation occurs when the general price level of goods and services rises, causing the value and purchasing power of a given currency to fall. Essentially, with the same amount of currency today, you can buy less of a good than you could a year ago during a time of inflation. And if you’re curious exactly how much less of a good you can buy, this inflation calculator will put it into specific dollar amounts for you.

Inflation is generally regarded as a problem. Politicians in particular promise to fight inflation and increase the value of the US dollar. After all, citizens around the country are finding it hard to keep up with inflation as their wages aren’t rising accordingly. But, this also raises a separate question for investors. Is it time to pull out of the market and sit in cash until things simmer down? If you’re curious about what rising inflation does to the stock market, keep reading. We’ll discuss historical data on the subject and explain what investors can expect as inflation rises. 

Is Inflation Something Investors Need To Be Worried About?

Although prolonged periods of inflation have been far and few between here in the United States, it doesn’t mean there isn’t cause for concern when it comes to the stock market. 

What does inflation do to the stock market? Well–sudden spikes in inflation have been known to cause volatility in the markets. Share prices tend to be based on expectations for companies’ future earnings. Thus, inflation is a potential headwind for these businesses and could result in disappointing earnings performance, investor pessimism, and stock sell-offs. 

On the other hand, the Fed’s response to heightened inflation has also proven to be a good thing for stocks in the past. So, it goes without saying that inflation is a unique force in the market that can lead to unpredictable stock behavior. 

What Does Inflation Do To The Stock Market?

In order to further discuss what does rising inflation do to the stock market, we will analyze some of the historical data on stock returns during periods of high inflation to give investors some clarity on what to expect in the markets as inflation rises. 

A Historical Look At Rising Inflation’s Impact On The Stock Market

When looking at historical stock return data and how it is correlated to periods of high inflation, it can give investors a good idea of how investors fared in the past, and how they should respond to the current economic conditions. 

So, let’s take a look at the data from some of the years with the highest rates of inflation in the past century in order to answer the question: what does inflation do to the stock market?


This was the year with the 5th-highest inflation on record for the United States at a rate of 10.9%, though the stock market growth was nearly double during the same period, with an S&P 500 return for the year of 19.2%. 


Just a few years later, the United States saw the highest yearly inflation recorded yet, at 14.4%. During the same year, the S&P 500 clocked in a growth rate of 5.2%, much behind the inflation rate, though still generating positive returns. 


A few decades later, inflation was on the rise again at a rate of 11.1% in 1974, following a 6.2% rate of inflation from 1973. Unlike the previous examples, the S&P 500 suffered severely during these years, with annual returns of -25.9% and -14.3% in 1974 and 1973, respectively. 


These years saw the highest rates of inflation in more recent times, with an 11.3% inflation rate in 1979 and 13.6% in 1980. Even still, stock market growth was roaring during these years, with the S&P 500 seeing annual gains of 18.5% in 1979 and an impressive 31.7% in 1980. 

So, What Does High Inflation Do To The Stock Market?

From the above data, we can see that there are more examples of stock market growth during years of high inflation rather than contractions. Of course, this is not a clear-cut rule that will be true every time, though it does tend to be the trend based on past data.  

Generally, investing in the stock market is useful because it is how investors can compensate for inflation. Thus, even in periods of uncertainty and high inflation, it is worthwhile to invest in the stock market. 

This historical data can help investors answer the question: what does high inflation do to the stock market? Therefore, it’s a good financial decision over the long term to hold stocks even though market volatility and price swings may be frequent in the meantime.

Two Options Investors Have When Inflation Is Rising

So even though investors can’t control how fast inflation rises and how quickly the Fed can tamper down on it, they do have options when it comes to protecting their portfolios and hedging against the market forces at play. 

Now that you understand what does rising inflation do to the stock market, you can move on to crafting a strategy that will protect your portfolio during inflationary times. You have two options – attempt to capitalize on current market conditions or sit on the sidelines with your cash until favorable conditions return. And because you can always make money in the stock market, we favor the former. Let’s start there:

Capitalize On Current Market Conditions

Whether the markets are going up or down, there’s always a way to make money in the stock market. Strategies like value investing, ETF shorting, stock shorting, and overall learning how to invest in a recession can all be ways for investors to watch the value of their portfolios rise even while in a bear market. 

To make money no matter the current market conditions, investors just need to be a bit more strategic. When having the right tools, it’s easy to make money in the markets at any time. For the best results, get a stock forecasting software to uncover opportunities despite unfavorable overall market conditions.

Timing the markets is always important, especially during times of high volatility and market uncertainty. Therefore, having a tool that can tell you exactly when to enter trades and give you clear guidance on which companies to buy or sell at a given time is invaluable. This type of software doesn’t just help you time your entrances and exits in positions – it helps you find opportunities on autopilot. And, you’ll gain an idea of the overall market sentiment – so you can see how other investors are reacting to periods of high inflation.

Sit On The Sideline With Cash Waiting For Market Correction

On the other hand, investors can choose to not participate actively in the markets during periods of high inflation. Instead, they can close out their positions and sit with the cash until there’s a market correction, and enter again at lower prices. 

This may be a route for those who lack the proper tools and knowledge to make intelligent trading decisions during periods of volatility. Rather, they can skip out on the action and wait for the markets to bottom out. When utilizing this strategy, investors are in an inherently less risky position, but they are also not subject to the upside that can come from utilizing one of the abovementioned strategies with the right tools and analysis. 

Can You Hedge Against Inflation As An Investor?

After taking all of this information into account, you may be wondering if it’s possible for investors to hedge against inflation. Your question should really be, can your return on investment outpace inflation, not hedge against it. Stocks can provide a way to make money faster than inflation can erode your money’s value — if you are diligent and disciplined as an investor.

For investors who want to learn how they can hedge against inflation and what the best hedges against inflation are, there are a number of ways that they can do so—and many experts agree that holding equities is one of investors’ best tools for fighting the detrimental effects of inflation. In fact, holding safe stocks that show an earnings growth rate that is at least equal to, if not higher than, inflation rates + interest rates is the key to outpacing inflation in your portfolio. 

Reallocating a portion of portfolio funds to stocks from bonds and diversifying holdings to global equities are both actions that investors can take to benefit from the stock market during inflationary periods. So even though there may be market volatility caused by rising inflation in the short term, the stock market returns generally beat out the rate of inflation over the long run. 

What Does High Inflation Do To The Stock Market? Final Thoughts

At the end of the day, inflation is a natural occurrence in the economy, though it can be unpredictable and cause economic uncertainty. But, what does inflation do to the stock market? Historically, the stock market has fared well during the years with the highest inflation rates, and these periods don’t tend to persist longer than a year or two. 

Even still, there are a number of ways that investors can manage their portfolios during these periods to make the most of the current market conditions by utilizing the proper tools and analysis, or hedge against losses by sitting on cash. 

Investing in quality stock forecasting software can help investors make informed decisions and accurately time the market. With the right tools, investors don’t have to play guessing games or rely on gut feelings–they can gain actionable insights and clear recommendations on stock purchases. Investors can try out VectorVest today and get a free analysis of any stock.