impact of inflation on equity markets?

Answer 1

Inflation increase the interest rate on bonds which compete with equities for investment funds. Investors want a risk premium on equity returns over the return on bonds so as the interest rate rises the return on equities must also rise. Since profits do not keep pace with inflation but rise like GDP, the price of equities will fall. A time series of DOW/GDP at http://www.economagic.com/em-cgi/charter.exe/var/togdp-dji+1950+2007+0+0+0+290+545++0
shows the effect of the high interest rates of the 70's and 80's had on the price of stocks.