We find striking differences across economic states in how monthly and quarterly stock returns are related to changes in inflation expectations. Over 1997:11 to 2017:12 when fears of a deflationary low-growth regime were presumably more prevalent, we find a positive relation between stock returns and changes in inflation expectations that was much stronger during weaker economic times. Conversely, over 1982:01-1997:10 when fears of a high-inflation low-growth regime were presumably more prevalent, we find a negative relation between stock returns and changes in inflation expectations that was marginally stronger during weaker economic times. Using survey data, we also find that the comovement between inflation expectations and expected future real economic growth depends upon the economic state in a manner fitting with our stock-inflation results. Our evidence fits well with the `signaling role of inflation’, as proposed in David and Veronesi (2013).
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