Inflation’s effect on stocks
Inflation is simply the diminishing of purchasing power. When inflation rises income and earnings that a company makes should rise as well. Since everything is based in dollars and everything is going up, theoretically the price of a share of stock should rise as well, but it does not always work out that way.
Certain companies react differently to inflation, and rightfully so, every company is different. With inflation comes the rise in interest rates from the federal reserve to try to temper inflation, this can cause a negative effect on the economy and the financial sector as well.
Personal wages generally lags the rate of inflation when inflation is abnormally high, so you do not want to own companies that are very sensitive to consumer spending in periods of high inflation. This includes companies in the casual dining industry and retail companies.
When inflation is high it usually foretells a tough economic environment. In tough economic environments you want to be invested in solid, dividend paying, bread and butter companies. AT&T, Coke, Johnson and Johnson, Proctor and Gamble are great examples, there are plenty of other examples as well.
How inflation effects stocks is unknown depending on the situation but you must have a game plan to capitalize on any economic situation.