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The Dual Effect of Inflation on Stock Price

Inflation is an important macroeconomic factor affecting the stock market price. The influence of this factor on the trend of stock market is complex. It cannot only stimulate the stock market, but also suppresses the stock market. Inflation is mainly due to excessive increase in the money supply. The money supply is generally proportional to the stock price, that is, the increase of the money supply will rise the stock price; on the contrary, the decrease of the money supply makes the stock price fall. But under some special circumstances, there will be reverse trend.


The relationship between money supply and stock price has three forms:

1. The increase of money supply, on the one hand, can support production and prices and prevent the decline of profits; on the other hand, the increase in demand for stocks will be an important factor in stopping the decline of stock prices.

2. The increase of money supply causes the price of social goods to rise, and the sales of joint-stock companies increase accordingly. As a result, the dividend represented by money quantity (i.e. the nominal income of stocks) rises to a certain extent, which makes the demand for stocks increase and the stock price correspondingly goes up.

3. The increase of money supply will lead to inflation. Inflation often leads to false market prosperity, and eventually leads to the false appearance of rising profits of enterprises. People tend to invest money in precious metals, real estate and short-term securities due to the awareness of maintaining value. As a result, the demand for stocks will also increase and the stock price will climb accordingly.

It can be seen from the above that the increase or decrease of the money supply isone of the important reasons affecting the stock price. With the increase of the money supply, the expanded social purchasing power will be invested in the stock, thus raising the stock price. On the contrary, if the money supply decreases and the social purchasing power decreases, the investment will reduceand the unemployment rate will increase. Finally, the stock price will certainly be affected. This is the main aspect of the problem.

However, when inflation reaches a certain extent, or even more than double digits, it will drive interest rates up, thus causing stock prices to fall, which is another aspect of its effect on stock prices.

In a word, the trend of stock market is consistent with that of inflation when the stimulation effect is greater, and the trend of stock market is opposite to that of inflation when the effect of repression is greater.

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