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The crucial premise that inflation is positive has been depended upon. P/E ratios rise when the inflation rate tends toward price stability (near 1% inflation), as shown in the figure, and fall when the inflation rate tends toward instability. As a consequence, P/E declines into deflation despite low-interest rates, creating a "Y Curve" effect.

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Since it would be anticipated that profits and dividends would decline during a period of deflation and consequently lead to lower valuations, this impact is consistent with the modern dividend discount model.

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