Inflation has certainly caught the attention of everyone in the market these days, and whether or not you’re comfortable investing in stocks probably has as much to do with whether you think this 5-7% inflation will continue for more than a few months as it does with your analysis of the economy or the future potential of any particular company.

Periods of high and rising inflation tend to be bad for stocks, both because inflation pressures operations at companies and because it brings down valuations… but that’s also partly because periods of high inflation in the past have led to spikes in interest rates and the Fed raising rates, sometimes rapidly, to cool off the economy and tame inflation. Over the much longer term, stocks and real estate tend to hold up best as investments that “keep up” with inflation, particularly including some niche areas of real estate like timber, but over the short term nobody really knows, and what probably drives returns the most is your ability to stay invested — stocks have already reacted pretty violently to the surprisingly high inflation we’ve had this year, since we are in a “react first, overreact second” market these days, so although some of the meme stocks and the most popular growth names are still pretty wildly overvalued, including some that I own, there are also lots of reasonable-looking opportunities in strong and growing companies who should be able to weather the inflation gyrations of the market. Even if the Fed comes out and raises interest rates dramatically to tamp down inflation sooner than expected, and brings a real market crash — something that I’d say is not very likely, since I think inflation will moderate on its own before aggressive action is taken, but unlikely and impossible are very different words.

The meaningful risk in my mind is that inflation gets a lot worse, it causes a big increase in interest rates, and everyone freaks out and buys less stuff, causing a recession that snowballs because the “wealth effect” feeling that many people have from rising home prices and rising stock prices disappears, and we get stagflation like the late 1970s and early 1980s (a stagnating economy, with high inflation). If that happens, things could certainly get awfully tough for stocks for at least a couple years, though the stock market also always sees the light ...