Inflation and stock returns: An industry analysis

Four hypotheses about the negative relationship between inflation and stock returns are analyzed with real returns in seven industries from 1968:4 to 1982:1. The tax and risk hypotheses predict that inflation effects will differ among firms. The alternative-asset and spurious-correlation hypotheses predict uniform inflation effects. The results support the spurious-correlation hypothesis; the negative inflation effect is insignificant in six of eight regressions when expected real income is added to regressions of real returns on expected inflation. The negative inflation effect is significantly related to depreciation expense in two industries, as predicted by the tax hypothesis.