Inflation versus Deflation and their Impact on Stock Markets

Many previous studies associated with long-term monitoring of equity returns data and inflation led to the conclusion that, historically, stock prices failed to keep up with inflation and the rate of return on shares was negatively correlated with the rate of inflation. When examining the impact of inflation on stock prices, several aspects can be applied, being an important element the different levels of expected inflation. Currently, analysts point out the danger of deflation, which can have a significant negative impact on both the stock markets and the real economy. The aim of this paper is to examine the impact of inflation on the stock markets accentuating the last decade, which is associated with considerable bubbles in stock markets. It is necessary to analyze the relationship between inflation and the stock market, in connection with monetary policy and its important instrument - interest rates. When doing the quantitative analysis, we pay the attention to the stock market within the European Union.