A Study On The Relationship Between Stock Price And Inflation

The relationship between stock price and inflation is one of the problems to which financial economists and monetary bureaus pay great deal of attentions in recent years. This paper will focus on two points, the future information of future inflation which be reflected in stock price and whether it is necessary to bring stock price into price index, which is studied and analyzed on an empirical basis with a model that fits financial situation of China through domestic and foreign literature review.With the concern of the former point, it is studied by validating "Fisher effect" and the anticipating ability of stock price to inflation, with the result that "Fisher effect" does not work in China and the information laid out is very difficult to unscramble, and the anticipating ability of the stock price to inflation exists, but is quite instable. By using "Dynamic Factor Index" to do the research and analysis on the latter point, whether it is necessary to bring stock price into price index, we conclude that the proportion stock price account for in "Dynamic Factor Index" is very little and could almost be ignored.Therefore, it is very difficult or unnecessary to directly bring stock price into the concern of the central bank (PBC), although the effect of the stock price to the real economics begins to emerge and have become a part of monetary policy transmission mechanism.