A new study by Goldman shows that stocks will do well if inflation remains muted, but an escalating consumer price index (CPI) will hurt returns. This according to a recent article in Chief Investment Officer.

According to Goldman chief U.S. equity strategist David Kostin, “The stock market tends to perform better during periods of low inflation than when inflation is high.” While that may sound like conventional wisdom, the article points out that the Goldman study offers the additional insight that “everything depends on the sustainability of the current inflationary surge.”

In other words, right now the market seems to by siding with the somewhat “benign” conclusion that the recent rise in CPI is transitory, triggered by pent-up demand and supply constraints. This is supported, the article notes, by a decrease in bond yields—which would not be happening if investors expected a major uptick in inflation.

The article notes that, since the end of double-digit inflation in the early 1980s, “the pattern has been for full-year CPI to stay in the low single digits, around 2%,” adding, “Whenever it came in at a high point, which was never much more than 5%, it quickly fell back.”

The Fed’s preferred inflation indicator, the core personal consumption expenditures index (PCE), reportedly rose to 3.1% in April, above the 2.9% consensus estimate. Goldman’s study found that since 1962, high inflation was accompanied by stock market returns of 9% annually, while low inflation saw returns of 15% (“high” and “low” defined by the CPI’s movement compared to projections).

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