Are stocks a good inflation hedge?

Longtime readers of mine will know that I do not believe in the story that stocks are a hedge against inflation. I have shown how the correlation between stock market returns and inflation changes over time, depending on how the market perceives inflation. Inflation from supply shocks is typically perceived as bad inflation and creates stock market drops, while inflation from demand shocks is ‘good inflation’.

Similarly, once inflation climbs above a certain level (typically around 4-5%), input prices for companies like wages and raw materials rise faster than they can adjust prices and hence profit margins get squeezed. If inflation comes from a supply shock, it will also depress end customer demand because people are experiencing a cost-of-living crisis and revenue growth for businesses declines as end demand drops at the same time as margins come under pressure. This is what we saw in 2022 and before that during the oil crises of the 1970s.

And while they don’t show anything new, the research of Xiang Fang, Yang Liu and Nikolai Roussanov in The Review of Financial Studies has the advantage of showing the reaction of different sectors in the US stock market as well as other asset classes to unexpected changes in inflation.

They calculate the beta of excess returns of stocks and other asset classes to changes in headline, core and energy inflation. I let you read the results for other asset classes, and focus here only on stocks. If equities are a perfect inflation hedge, the beta of the excess returns should be 1.0 or higher, meaning that a one percentage point increase in inflation creates a one percentage point or higher increase in excess returns above risk-free assets.

If the beta is between zero and one, the asset is an imperfect inflation hedge that at least provides some protection against inflation. But if the beta is less than zero, excess returns decline if inflation increases, and the asset is no inflation hedge at all.

So, here is the average beta of US stocks and different sectors within US stock markets, as well as international equities (in US dollars) for the period 1969 to 2019.

Inflation betas of stock market excess returns

Source: Fang et al. (2026)

Clearly, stocks are not at all an inflation hedge, either when measured against headline inflation or core inflation. Some sectors like manufacturing and real estate provide a small inflation hedge, but in general, I think we should bury the idea of stocks as an inflation hedge once and for all.

Of course, times change, and an interesting result is the chart below, which shows inflation betas for the first and second half of the observation period. As you can see, the beta to core inflation is always negative, but in the second half of the observation period from 2000 to 2019, stocks provided at least some inflation hedge. But this is exactly the period when inflation shocks were almost always the result of strong end demand, not supply shocks. In other words, this is the period when inflation shocks were almost always good inflation shocks. In the 1970s and 1980s, as well as since the pandemic, inflation shocks have been mostly bad inflation shocks again, and investors need to adjust their expectations accordingly.

Inflation betas change over time

Source: Fang et al. (2026)