Earlier today I posted a chart showing the correlation between inflation and the cyclical P/E ratio (Inflation and the Cyclical P/E10). I've now applied the same charting technique to the Q-Ratio. As we might expect, the results are similar.

As with the P/E Ratio, we would expect that low inflation and the (usually) accompanying low interest rates would be conducive to equity price gains that would exceed earnings support. Both companies and their investors should benefit from low inflation. Conversely, periods of high inflation or deflation would present obstacles for companies and investors, leading to lower P/E ratios.

Here is a chart that confirms this assumption. It plots the correlation, with each dot representing a monthly Q-Ratio measured on the vertical axis with the inflation rate at the time shown on the horizontal axis.

Click for a larger image

The chart also shows that low inflation is no guarantee of high Q ratios. There are a significant number of data points in the inflation sweet spot that are below the mean Q-Ratio.