Expected Inflation, Stock Returns, and the Changing Nature of Inflation Non-Neutrality

We show that the relation between stock returns and changes in expected inflation depends importantly on economic conditions. For both quarterly and monthly stock returns over 1982:Q1-1997:Q3 (1997:Q4-2017:Q4), we find a negative (positive) stock-inflation relation that was much stronger during weaker-economic times. Fitting with a `changing nature of inflation non-neutrality' channel, we find consistent time-variation in how expected inflation is related to expected economic growth and the equity premium. When controlling for more fundamental stock-valuation determinants in a multivariate setting, the partial stock-inflation relation is diminished but remains important and qualitatively similar, suggesting a `signaling intensity of inflation' secondary channel