Inflation Risk Dynamics and Its Effects on Corporate and Market Behavior

Abstract

This article investigates how inflation risk dynamics influence corporate and market behavior in a context of renewed inflation volatility and heightened macroeconomic uncertainty. The study conducts a systematic literature review of peer reviewed articles published between 2019 and 2023, examining how inflation levels, expectations and uncertainty affect firms’ investment, pricing, employment and financing decisions, as well as the pricing of assets in equity and bond markets. The synthesized evidence shows that persistent and uncertain inflation tends to depress real investment, encourage caution toward irreversible projects and shape managers’ pricing and wage setting strategies. On the financial side, the review finds that inflation risk is a priced factor, generating time varying risk premia, sector specific valuation effects and regime dependent hedging properties across asset classes. The article discusses these results by organizing studies into corporate and market focused strands and concludes that inflation risk must be analyzed within an integrated macro financial framework linking firm decisions, monetary policy and asset pricing.