The Effects of Inflation and Interest Rates on Stock Returns: Evidence From Three Centuries of UK Data

Using data since 1700, this paper finds that:- (i) The oft-cited negative correlation between expected inflation and stock returns is confined to the post-1950 period. If anything, the two variables are positively associated in the preceding period. (ii) There is a negative relationship between expected nominal interest rates and stock returns throughout this period. So, inflation and real interest rates matter jointly. Given (ii), we may explain (i) by noting that inflation was associated with a much larger decline in real interest rates in the pre-1950 period. Many existing theories would be hard put to explain these empirical facts.

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