Stock returns and inflation linked to real output and monetary shocks.
Stock returns and inflation are related, influenced by supply and demand shocks. Supply shocks (real output shocks) lead to a negative link between stock returns and inflation, while demand shocks (monetary shocks) create a positive connection. The relationship between stock returns and inflation changes over time and across countries, depending on the impact of these shocks. Evidence from the U.S., U.K., Japan, and Germany shows that this relationship varies during different periods.