N°26-05: The Value of Pricing Power When Investors Benchmark to Headline Inflation

We study equity valuation when investors benchmark firms against headline inflation although pass-through varies across firms. In standard valuation, inflation is valueneutral even with heterogeneous pass-through if investors use firm-specific inflation. Benchmarking to headline inflation conflates nominal cash-flow growth with real performance and shifts discount rates at inflation announcements. Pricing power shapes both channels by enabling greater pass-through and reducing perceived inflation exposure. Empirically, higher-pricing-power firms exhibit smaller stock-price declines and smaller cost-of-capital increases following inflation surprises. The April 2025 tariff announcement yields similar pricing-power-based return differences. These results offer new insights into inflation's implications for asset pricing and valuation.