As to inflation and crashes…

Inflation does not cause crashes. Inflation is caused by an excess of money relatively speaking or a shortage of commodities. This causes the devaluation of money and the valuation of commodities.

Shares of companies should also go up, because said companies hold intrinsic and extrinsic values and deal with commodities.

Why does the market panic during inflation?

1. “[the market] … feels like the top” Many people may share that opinion and may choose to trade less, so trading volume goes down and markets go down. This is very counterintuitive. But fear and herd mentality take over sometimes.
2. People lose faith in their currency. This is very extreme. Basically the Federal Reserve continues printing money at higher levels (via quantitative easing or bond repurchase)- money becomes truly debased. Or a foreign government decides to dump a ton of currency in our market.
3. The biggest cause of a crash is a quick rise in interest rates. The interbank lending rate as set by the fed is at near 0%. Once the fed increases rates people may try to realize their gains in the stock market and cash out and gain a stable interest rate on money who’s initial amount will never go down (so zero risk). If there is a mass exodus (again fear and herd mentality) that can affect trading volume, therefore Supply/demand and ultimately share prices.

Photo by Sean Robertson on Unsplash

Why would the Fed increase rates and reduce the amount of circulating currency? In response to inflation of course! To keep it in check they will slow down bond repurchases, which effectively remove money from circulation. They will also raise interest rates and that means investors will buy bonds (so give the fed money) to collect an interest rate.

During inflationary periods, the fed plays a huge role. Luckily there is a play book. After 2007/08 the country was in a similar (yet different) spot, with near zero interest rates, the fed then gave ample warning and a schedule of rate increases and mostly stuck to them- so that higher interest rates could be slowly priced in.

The biggest causes of crashes are fear, volatility/unpredictability, and herd mentality.