Who Loves Inflation? Wall Street Loves Inflation!

The stock market has a fever. And the only prescription is more inflation. That's the clear message from the below chart, courtesy of Reuters.

StocksInflation.png

Since the recovery began in mid-2009, the S&P 500 (orange) and expected inflation (blue) have tracked each other almost perfectly. Intuitively, that might seem obvious. As inflation goes up (or down), so too do stocks, right? Actually, not always.

Consider the 1970s stagflation. Prices spiraled out of control most of the decade, but stock prices didn't. And after Paul Volcker finally succeeded in whipping inflation in the early 1980s, stocks moved in the opposite direction: They soared.

It's all about whether there is too much or too little spending in the economy. When there's too much -- like in the 1970s -- inflation isn't good for stocks. But when there's too little, stocks will take any spending they can get. Even if that extra spending comes from inflation. As Scott Sumner and Paul Krugman have pointed out, the above chart is Exhibit A in the case that the U.S. economy is suffering from a shortage in demand, above all else.

Hopefully, somebody at the Fed is listening to the stock market.

Presented by

Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.

Saving the Bees

Honeybees contribute more than $15 billion to the U.S. economy. A short documentary considers how desperate beekeepers are trying to keep their hives alive.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

How to Cook Spaghetti Squash (and Why)

Cooking for yourself is one of the surest ways to eat well.

Video

Before Tinder, a Tree

Looking for your soulmate? Write a letter to the "Bridegroom's Oak" in Germany.

Video

The Health Benefits of Going Outside

People spend too much time indoors. One solution: ecotherapy.

Video

Where High Tech Meets the 1950s

Why did Green Bank, West Virginia, ban wireless signals? For science.

Video

Yes, Quidditch Is Real

How J.K. Rowling's magical sport spread from Hogwarts to college campuses

Video

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

More in Business

Just In