When there is inflation, how come the stock market goes up?

Question

I would tend to think higher prices would lead to less dicrectionary income and that would be less money going into stocks?

Answer 1

Inflation usually causes the stock market to go down. It leads to an increase in the nominal interest rate due to the inflation premium added to the real rate. Since investors want a higher return (earnings) on stocks than bonds because the have more risk, as interest rates rise stock prices fall, and the reverse. Look at the drop in the market in the 70's and the recovery in the 80's as inflation grew and the subsided.
If increase interest rates is small and earning are growing stocks can go up, but it is not the norm.

Answer 2

I think you are looking at it kinda backwards. Growth in the economy will lead to the stock market increasing, and the same growth will lead to inflation.

The stock market increases because companies have more value because of their growth.

Inflation increases because more goods are being purchased, prices increase to compensate for the short run inability for supply to adjust

Answer 3

depends on the amount of inflation. some inflation is good as its necessary to grow the economy. too much inflation would lead to hyper inflation. no inflation well will lead to deflation, which is a strinking economy with higher prices.