An increase in inflation expectation can also affect the firms future cashflows. Typically, think about the firms net cashflow every period is given by (p-c)X, where p is the firms output price, c is the firms cost of good sold, and X is the amount of goods the firm produces. (Here for simplicity we assume there is no tax, no G&A cost, no interest payment, and no all other cash expenditures)

4. In general, there are two types of inflation, demand-pull inflation and cost-push inflation. How do these two types of inflation affect a firms net cashflow differently?

5. When investors expect demand-pull inflation, how does the increase in their inflation expectations affects their stock valuations? What kinds of stocks will they buy and what kinds of stocks will they sell?

6. When investors expect cost-push inflation, how does the increase in their inflation expectations affects their stock valuations? What kinds of stocks will they buy and what kinds of stocks will they sell?