There is evidence that the P/E of the market has more to do with changes in consumer prices than any other factor. From 1900 to 2005, the highest average P/E occurred when the average change in consumer prices was 2.6%. In general, the P/E ratio is inversely proportional to the absolute value of the change in prices, in other words, the higher the price change, the lower the P/E. so inflation is directly affected by this.
Some claim that the P/E ratio is mostly dictated by interest rates, but the level of correlation of P/E ratios to interest rates is much lower versus that to the magnitude of price change.
