DW8 Growth, page-7594

@ilikethestock, I'm not sure that I agree with your view of the impact of inflation on the value of a stock. I would value your, and others' insight.

If inflation is running at 10% pa., then the value of $1 in real terms falls by 1/11th (8.9%) every year. In this case, in 3 years time the value of $1 is only a little over 75c. Obviously, if future earnings don't change due to inflation, then the value of these future earnings in 3 years time is 25% below where I it would need to have been to justify the share price today. But if my earnings increase by the rate of inflation because I can put my prices up (and I don't see why this would not apply to DW8), then they stay the same in real terms, and the share price should also increase by the rate of inflation. In this case, $1 invested in DW8 3 years later would, all other things being equal, be worth $1.33.

The main reason that inflation can cause a fall in share values is that interest rates tend also to increase, which raises the risk free rate of return, meaning that equity investors require a greater return for taking the additional risk rather than sticking money in a bank account now providing a better return.

Does this logic stack up, or am I mixing up some of my school boy economics?