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Stock returns, equity risk premium, inflation
This letter is intended to demonstrate that price inflation and stock returns display differing relationships depending on the measure of inflation used. Using data from 1966 – 2009, it appears that no correlation exists between any measure of price inflation and stock returns or dividend yield in the period 1983 – 2009. We do find a negative correlation between monetary inflation and dividend yield for the full sample. We also question the regularity that price inflation and stock returns are negatively related in post-World War II. This appears to depend on the specification of the model used.