Working Paper No. 27
By Jo Corkish and David Miles
If low and stable inflation is maintained then the economic environment in the United Kingdom will be very different from any sustained period in the post-war era. This may have significant implications for financial markets: asset prices, the demand and supply for various types of financial contract, and the structure of financial intermediation are likely to be affected by a low inflationary environment. This paper examines the empirical evidence on the links between asset returns, inflation and inflation variability. We calculate the real returns on a range of financial and physical assets and develop a model of inflation expectations and inflation variability. We then estimate the impact of anticipated inflation, inflation shocks and the variability of inflation on asset values.