Historical data indicates that real returns on U.S. stocks tend to drop rapidly once inflation rates exceed 3%. This is not the first time that stocks have been seen as a good inflation hedge. The relationship between S&P 500 real returns and inflation rate can be easily demonstrated using Robert Shiller’s data for the U.K. stock market since 1871. As long as inflation rates remain below 2% to 3% in the US., stock market real returns remain high and unaffected by inflation. However, once inflation rises above 3%, real returns begin to drop, and once they surpass 5%, they tend to fall rapidly towards zero. Higher inflation translates into a higher discount rate for future cash flows, leading to a decrease in stock markets.