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Inflation and Asset Returns

Author

Listed:
  • Anna Cieslak

    (Fuqua School of Business, Duke University, Durham, North Carolina, USA)

  • Carolin Pflueger

    (Harris School of Public Policy, University of Chicago, Chicago, Illinois, USA)

Abstract

The past half-century has seen major shifts in inflation expectations, how inflation comoves with the business cycle, and how stocks comove with Treasury bonds. Against this backdrop, we review the economic channels and empirical evidence on how inflation is priced in financial markets. Not all inflation episodes are created equal. Using a New Keynesian model, we show how “good” inflation can be linked to demand shocks and “bad” inflation to cost-push shocks driving the economy. We then discuss asset pricing implications of “good” and “bad” inflation. We conclude by providing an outlook for inflation risk premia in the world of newly rising inflation.

Suggested Citation

  • Anna Cieslak & Carolin Pflueger, 2023. "Inflation and Asset Returns," Annual Review of Financial Economics, Annual Reviews, vol. 15(1), pages 433-448, November.
    • Handle: RePEc:anr:refeco:v:15:y:2023:p:433-448
    DOI: 10.1146/annurev-financial-110921-104726
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    Citations

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    Cited by:

    1. Schnorpfeil, Philip & Weber, Michael & Hackethal, Andreas, 2025. "Inflation and Trading," Journal of Financial Economics, Elsevier, vol. 173(C).
    2. Chibane, Messaoud & Kuhanathan, Ano, 2025. "Examining the impact of natural gas price volatility on Euro zone inflation expectations," The Quarterly Review of Economics and Finance, Elsevier, vol. 104(C).
    3. Andreas Schrimpf & Markus Sihvonen, 2025. "Inflation and the joint bond-FX spanning puzzle," BIS Working Papers 1320, Bank for International Settlements.
    4. Damiaan Chen & Roel Beetsma & Sweder van Wijnbergen, 2026. "On the Limits of Hedging Inflation Risk in Investment Portfolios," Working Papers 858, DNB.
    5. Martijn Boermans, 2025. "Hedging against inflation: International evidence on investor clientele effects in the bond market," Working Papers 838, DNB.
    6. Ceballos, Luis & Christensen, Jens H.E. & Romero, Damian, 2025. "A post-pandemic new normal for interest rates in emerging bond markets? Evidence from Chile," Journal of International Money and Finance, Elsevier, vol. 150(C).
    7. Diego Bonelli & Berardino Palazzo & Ram Yamarthy, 2025. "Good inflation, bad inflation: implications for risky asset prices," Working Papers 2525, Banco de España.
    8. Jonathon Hazell & Stephan Hobler, 2024. "Do Deficits Cause Inflation? A High Frequency Narrative Approach," Discussion Papers 2439, Centre for Macroeconomics (CFM).
    9. Willem THORBECKE, 2026. "Bond-stock Price Comovements: Evidence from the 1960s to the 1990s," Discussion papers 26011, Research Institute of Economy, Trade and Industry (RIETI).
    10. Randl, Otto & Simion, Giorgia & Zechner, Josef, 2025. "Pricing and constructing international government bond portfolios," Journal of Financial Economics, Elsevier, vol. 173(C).
    11. Ceballos, Luis & Ng, Oscar, 2024. "Do investors care about inflation risk? Evidence from global bond portfolio allocation," Economics Letters, Elsevier, vol. 243(C).

    More about this item

    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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