Stock markets in the world falling because there is inflation pressures, yet stocks are supposed to be inflation hedging, how do we reconcile this.
Why do you think stocks are an effective inflation hedge? This would not typically be the case.
Inflation will increase a company’s cost base as the price of inputs and labour will increase over time. In simple terms this means that higher inflation will reduce a company’s earnings. With deteriorating earnings you would expect that stock prices will adjust downwards, all else equal.
Stocks will be better at hedging inflation if they are able to pass through inflation to the customer. This can be evident in certain segments of the market such as infrastructure and utilities which may have inflation pass-through mechanisms such as CPI-linked contracts or rents. For this to be effective though these companies need to have pricing power, because ultimately if they increase their prices but the customer is no longer willing to pay then the hedging mechanism is essentially worthless.
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