How does inflation affect stocks?

Inflation's relationship with the stock market is complicated—but it's not random. The short version: moderate inflation is usually fine for stocks, sometimes even beneficial. High or unexpected inflation is where things get messy. Understanding the mechanism behind that difference puts you in a much stronger position than most investors.

If you've watched the headlines flip between "inflation is good for stocks" and "inflation is crushing the market," you're not missing something—the relationship really is that context-dependent. The same economic force that helped the S&P 500 climb 81% between 2020 and 2025 (while consumer prices rose only about 23%) also triggered an 18% market decline in 2022 when inflation hit 9%.

So which is it? The answer depends on how much inflation, how fast it's rising and—critically—what kind of stocks you own. Let's work through it.

It can do both, and the direction largely depends on the level of inflation and what's driving it.

This is generally the sweet spot. Moderate inflation signals a growing economy—companies are selling more, revenue is rising and businesses can pass modestly higher costs along to customers without losing them. In this environment, stocks tend to do well. Research going back to 1973 shows equities outperformed inflation roughly 90% of the time when inflation was low and rising.

The picture changes. High inflation typically triggers Federal Reserve rate hikes, squeezes corporate profit margins and erodes investor confidence. That same research found that when inflation was high and rising, stocks beat inflation only about half the time—essentially a coin flip. The 2022 experience is the clearest recent example.

There's also a crucial distinction between nominal and real returns. Stocks might technically go up in dollar terms during inflation—but if prices are rising 8% and your portfolio gained 4%, you've actually lost purchasing power. That's a real loss even if it looks like a gain on paper.

Most explanations of inflation and stocks stop at "higher costs hurt profits." That's true—but it misses the deeper mechanism that drives the bigger moves. To understand why growth stocks fall so much harder than value stocks when inflation rises, you need to understand the discount rate.

Every stock's price is essentially a bet on future earnings. But future earnings are worth less than present earnings—you'd rather have $100 today than a promise of $100 in 10 years. The rate at which you discount that future payment is tied to interest rates.

This dynamic affects two broad categories of stocks very differently; growth and value stocks.

• Growth stocks, think technology or biotech companies, expect most of their profits years or decades from now.
• Value stocks, think utilities, consumer staples, or established financial firms, generate more of their earnings today.

That distinction matters enormously when interest rates rise.

Imagine a company expects to earn $100 in 10 years. When interest rates are at 1%, that future $100 is worth roughly $91 today. When rates rise to 5%, that same future $100 is worth only about $61 today, a 33% drop in present value, with no change in the underlying business.

Now imagine the business doesn't expect to earn most of its profits for 15 or 20 years. The discount effect is even more dramatic. That's exactly the situation for many growth and technology companies, which is why they took the biggest hits during the 2022 inflation and rate-hike cycle.

When the Federal Reserve raises interest rates to fight inflation, it increases this discount rate across the entire market. Companies with profits concentrated far in the future (growth stocks) lose more present value than companies with steady near-term profits (value stocks, consumer staples, energy). This isn't just theory; it's the mechanism behind most of what you watched happen in 2022.

This distinction is worth slowing down on, because it's one of the most practically useful things you can understand about your portfolio.

The concept at the heart of this divide is pricing power, which is the ability to raise prices when costs increase without losing customers. A utility company, a pharmaceutical firm with patented drugs or a consumer staples brand with loyal customers often can pass inflation along because customers will continue to purchase those products or services. A startup or a company in a hyper-competitive market usually cannot.

This is also why "economic moat" businesses—companies with structural advantages that protect their market share—tend to be more resilient in inflationary periods. They can maintain profit margins even when input costs rise.

Inflation doesn't hit stocks in isolation. It triggers a response from the Federal Reserve that often matters as much as the inflation itself.

The Fed's primary tool for fighting inflation is raising the federal funds rate. Higher rates ripple through the economy in several ways that affect stocks:

• Borrowing becomes more expensive for businesses and consumers alike. Companies that relied on cheap debt to fund growth face higher interest payments and reduced investment capacity.
• Consumer spending slows. As mortgages, car loans, and credit card rates rise, households have less money to spend on goods and services. That reduces revenue growth across many industries.
• Safer alternatives become more attractive. When Treasury bonds yield 4–5%, investors don't need to take stock market risk to earn a reasonable return. This reduces demand for equities, particularly growth stocks.
• Valuations compress. The higher discount rate reduces the present value of future earnings across all stocks, but especially those with long-dated cash flows.

How the market reacts to rate hikes depends enormously on context. Widely anticipated hikes in response to clearly elevated inflation tend to land more gently. Unexpected or aggressive hikes (or hikes that come when the market didn't expect them) can cause sharp, fast declines.

Not all stocks move together during inflationary periods, and sector selection has historically made a meaningful difference. The common thread among the stronger performers: near-term cash flows, low debt and the ability to raise prices without losing customers.

• Energy: Strongest track record; revenues are directly tied to energy prices, a key driver of inflation itself.
• Consumer staples: People keep buying necessities regardless of price levels, and established brands usually can pass costs along.
• Healthcare: Inelastic demand and pricing power from patented products provide a buffer.
• Equity REITs: Rising rental income and property values offer a partial inflation hedge.
• Utilities: Natural monopolies help, but high debt loads can make them sensitive to rate increases.
• Technology/growth stocks: Most vulnerable; long-dated cash flows are heavily penalized when discount rates rise.
• Mortgage REITs: Behave like long-duration bonds and tend to perform poorly when rates rise.

Track record data based on rolling 12-month periods, March 1973–December 2025. Source: LSEG Datastream, Schroders research. Past performance does not guarantee future results.

Beyond stocks, two assets come up a lot in inflation conversations: commodities and gold. Commodities—things like oil, wheat and metals—have a straightforward connection to inflation: rising commodity prices are often what's pushing everyday prices higher in the first place. If you own exposure to commodities, you're effectively on the side raising prices rather than just paying them. Energy stocks and commodity ETFs are the most practical way for most investors to get there. Just keep the allocation modest. Commodities can be volatile and unpredictable beyond the inflation story.

Gold is trickier, classified as a precious metal. Its reputation as an inflation hedge is more powerful than its actual track record. Gold tends to do well when people are scared—during periods of financial uncertainty or currency concerns—which sometimes lines up with inflation, but not always. The evidence for gold consistently beating inflation is thinner than most people assume. A better way to think about it: gold is an anxiety hedge, not an inflation hedge. Useful in small doses, but don't count on it to carry the weight.

Both, actually, and they're not in conflict. They just operate on different time horizons.

In the short term, high inflation is a genuine headwind for stock prices. The 2022 experience—where the S&P 500 index fell roughly 18% as inflation peaked above 9%—is exactly what the data would predict. Profit margin compression, rate hikes and investor uncertainty all weigh on prices in the near term.

Over the long term, the case for stocks as an inflation hedge is stronger than most people realize. Since 2020—a period that included the highest inflation in four decades—the S&P 500 has risen roughly 81% while CPI increased about 23%. Publicly traded companies have a structural advantage: they can raise prices. If everything costs more, the companies selling those things earn more revenue. Their profits, and eventually their stock prices, tend to reflect that.

The implication for long-term investors: short-term inflation-driven volatility, while uncomfortable, has historically been a temporary condition. The more actionable concern is whether your specific holdings—in terms of sector, debt levels and pricing power—are positioned to weather the turbulence during those difficult stretches.

The 2022 episode is the most important recent data point on inflation and stocks—and it's worth understanding in some detail, because it illustrated almost every mechanism discussed in this article simultaneously.

By mid-2022, inflation had reached 9.1%, the highest level since 1981. The Federal Reserve responded with the fastest pace of rate hikes in a generation, raising the federal funds rate from near-zero to over 4% in less than a year. The results for financial markets were predictable in hindsight but painful in real time:

• The S&P 500 fell roughly 18% for the year
• Growth and technology stocks declined far more sharply; the Nasdaq Index fell over 30%
• Energy stocks surged, driven directly by the oil price spike that was partly causing the inflation in the first place
• Consumer staples and healthcare held up better than the broader market
• Long-duration bonds performed historically badly, falling more than 20% for the year in some cases

By late 2023 and into 2025, inflation had normalized significantly, and markets recovered then surged to new highs. The long-term investors who stayed diversified and didn't make panicked changes at the bottom in 2022 came out ahead. The ones who over-concentrated in growth stocks leading into the downturn felt it acutely.

There's no single "inflation-proof" portfolio, and anyone who tells you otherwise is oversimplifying. But there are several well-supported approaches to making your portfolio more resilient:

Companies that can raise prices without losing customers tend to protect their margins even when input costs rise. Look for businesses in industries with limited competition, strong brand loyalty, or essential products and services. These characteristics don't guarantee outperformance, but they're a meaningful starting point.

In inflationary periods, near-term earnings matter more relative to distant projected earnings. Value stocks, which tend to trade at lower multiples and generate more immediate cash flows, have historically held up better. This isn't a call to exit growth stocks entirely, but a tilt toward value in your existing allocation is a reasonable response to persistent inflation.

Companies that have consistently raised dividends over time—sometimes called Dividend Aristocrats—tend to combine the qualities inflation rewards: pricing power, stable earnings and financial discipline. The income also provides a real return that partially offsets inflation's erosion of purchasing power.

Long-duration bonds performed disastrously in 2022. Short-term bonds and Treasury Inflation-Protected Securities (TIPS) offer better inflation protection for the fixed-income portion of your portfolio. Cash loses purchasing power in inflation, which is why investors tend to reduce cash allocations and increase productive asset holdings during inflationary periods.

This bears repeating. If your portfolio is broadly diversified across stocks, inflation is generally working for you over time, even when it causes short-term pain. Making dramatic investment changes to hedge against inflation can introduce new risks and costs, and may mean missing the recovery. As Morningstar's research has pointed out: you don't want inflation protection to dominate your portfolio.

Your investment timeline matters. If you’re in your 30s saving for retirement or rebalancing your retirement portfolio in midlife or investing in your 60s, how you diversify your portfolio relative to your timeline is important. Make sure you are aware of the following factors and adjust them appropriately for your timeline.

• Moderate inflation (<3%) has historically been fine for stocks; equities outperformed inflation ~90% of the time in this environment
• High inflation (>3%) creates real headwinds: profit margin pressure, Fed rate hikes, discount rate increases and reduced consumer spending
• Because of their sensitivity to the discount rate mechanism, growth stocks are more vulnerable to rising inflation than value stocks.
• Energy, consumer staples and businesses with strong pricing power have the best historical track records in inflationary periods
• Over long-time horizons, a diversified stock portfolio has been one of the most effective inflation hedges available to ordinary investors
• Short-term volatility is real, but reacting to it by making dramatic portfolio changes has historically hurt returns more than the inflation itself.

Working with a qualified financial advisor can make all the difference in navigating uncertain economic times. A Thrivent financial advisor can help you build a personalized strategy that accounts for inflation's long-term impact while keeping your broader financial goals firmly in sight. When market volatility dominates the headlines and emotions run high, having a trusted professional in your corner helps ensure that short-term noise doesn't derail your long-term progress. The key to financial confidence isn't predicting what the market will do next — it's having a plan that's built to weather whatever comes.