Common stocks as a hedge against inflation: Evidence from century-long US data

We find strong evidence that US common stocks have been a hedge against inflation in the long run, from the early 1950s. Adopting a two-regime threshold vector error-correction model, we find that the stock price and the goods price are co-integrated with unit elasticity, with stock return and inflation showing asymmetric error correction. ► A generalized version of the Fisher hypothesis is tested using US data. ► We test for threshold co-integration between the stock price and the goods price. ► We find that US common stocks have been an effective hedge against inflation. ► We find that this long-run relationship holds from the early 1950s.