it has been long absent, it is hard to remember what a curse inflation is. In other places, it is hard to forget it. Take Zimbabwe. In 2008 it suffered an inflation rate in the squillions. Prices doubled every few weeks, then every few days. Banknotes were so much confetti. Some people turned to equities as a store of value. A share purchased on Monday might be sold on Friday. Harare’s stock exchange was almost like a cash machine.
Start with the evidence that stocks beat inflation over the long haul. In the most recent Credit Suisse global investment returns yearbook, a long-running survey, Elroy Dimson, Paul Marsh and Mike Staunton show that global equities have returned an average 5.2% a year above inflation since 1900. You may quibble that the survey covers the sorts of stable places that have had a long run of stock prices in the first place, such as Britain and America. Even so, the finding fits with intuition.
Now for the headache. For the most part, financial markets reflect the view that inflation will remain low. Nominal bond yields are negative in much of Europe and barely positive in America. In stockmarkets, there has for a while been a sharp divide. Companies that do well in disinflationary environments are expensive; businesses that might do better in inflationary ones have generally lagged behind. The immediate prospect is indeed for an excess of supply.
Inflation is encouraged by credit financing. The higher the credit the more interest payment will be and that increase demand for equity returns.
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