Are Concerns About Inflation Inflated?

What is the Market Return Net of Inflation?
US consumer prices were up by 5.4% for the year ending June 2021, the largest annual increase since August 2008. Naturally, inflation is at the center of attention for many US investors. There is some good news for investors looking to outpace inflation over the long term.

The image above shows average real returns (that is, returns net of inflation) to different classes in years with high (above-median) inflation from 1927 to 2020. We consider a total of 23 US assets that span bonds, stocks, industries, and equity premiums. Over this period, inflation averaged 5.5% per year in high-inflation years.

The Market Adjusts Quickly
While average real returns were mostly lower in years with high inflation compared to years with low inflation, the exhibit shows that all assets except one-month T-bills had positive average real returns in high-inflation years.

1927 to 2020 is useful because it covers periods with double-digit US inflation (like the 1940s and ’70s) as well as periods with deflation (like the Great Depression). But we find similar results over the most recent 30-year period (1991-2020), when US Inflation was relatively mild and stable. Overall, outpacing Inflation over the long term has been the rule rather than the exception among the assets we study.