Forecasting Inflation's Effect on Stocks Tough; Market History Isn't Necessarily a Clue
Back in 1965, inflation was becoming bothersome. Prices began rising as the Vietnam War was heating up and the military was monopolizing a lot of the nation's productive capacity.</br></br>The Dow Jones industrial average, meanwhile, was going nowhere. Stocks just weren't attractive when there was inflation to worry about.</br></br>Inflation was on the rise again in 1973, this time because Arab members of the Organization of Petroleum Exporting Countries were creating an oil shortage. And the Dow took a beating. Once again, inflation and stocks didn't mix.</br></br>But there have been other times when Wall Street handled inflation well. If the prices of a manufacturer's products are automatically rising with inflation, that company's profits will also climb - at least until costs catch up. So there is an excuse - although a weak one - for people to bid up the price of equities.</br></br>Today, inflation may or may not be getting worse. There are reasonable arguments for either view. Nevertheless, the government's numbers say that inflation is worsening, with prices at the producer level rising last month at a 7.2 percent annual rate and consumer prices jumping by 4.8 percent a year.