Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/302721 
Year of Publication: 
2024
Series/Report no.: 
CESifo Working Paper No. 11236
Publisher: 
CESifo GmbH, Munich
Abstract: 
We study investors' perceptions of inflation through the lens of a high-frequency event study and document that they have a stagflationary view of the world. In response to higher-than-expected inflation, investors expect firms' nominal cash flows to remain stagnant while discount rates increase, resulting in lower stock prices. Both the equity risk premium and nominal risk-free yields rise. However, longer-term real yields remain unchanged, and policy-sensitive real yields even decline, with increases in nominal yields offset by larger increases in inflation expectations. Consistent with a stagflationary view in which investors interpret inflation as a marginal cost shock, investors expect firms with low market power to suffer larger declines in cash flows. Cash flow expectations of equity investors are aligned with those of professional earnings analysts, both in the time series and across the market power distribution.
Subjects: 
inflation
stock returns
stagnant cash flows
market power
JEL: 
G12
E31
E44
L11
Document Type: 
Working Paper
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