Ever since the Fed started quantitative easing, I hear from people who are concerned about inflation. I haven’t been and have expected inflation to stay under control. Deflation is more of a risk than inflation. Here’s another summary of reasons to believe that by David Kotok.
Meanwhile, low inflation is a very healthy environment for the stock market. It means that inflation distortions in reports of earnings are nearly nonexistent. That implies that the quality of earnings reports is very high, since they do not contain the distortions that occur in accounting systems when inflation is high.
Higher-quality earnings justify higher price/earnings multiples and higher stock prices. There is a consistent linkage between very low inflation and very strong asset pricing. This is particularly so when interest rates are very low and likely to stay low for a very long time.