Will Inflation Hurt Stocks? Not Necessarily.

Investors may wonder whether stock returns will suffer if inflation keeps rising.  Here’s some good news: Inflation isn’t necessarily bad news for stocks.

A look at equity performance in the past three decades does not show any reliable connection between periods of high (or low) inflation and US stock returns.

Since 1991, one-year returns on US stocks have fluctuated widely.  Yet weak returns occurred when inflation was low in some periods, and 23 of the past 30 years saw positive returns even after adjusting for the impact of inflation.  That was the case in the first six months of 2021, too (see Exhibit 1).

Over the period charted, the S&P 500 posted an average annualized return of 8.5% after adjusting for inflation.  Going all the way back to 1926, the annualized inflation-adjusted return on stocks was 7.3%.

History shows that stocks tend to outpace inflation over the long term—a valuable reminder for investors concerned that today’s rising prices will make it harder to reach their financial goals.

1. Real returns illustrate the effect of inflation on an investment return and are calculated using the following method: [(1 + nominal return of index over time period) / (1 + inflation rate)] − 1. S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global.  All rights reserved. 

2. Based on non-seasonally adjusted 12-month percentage change in Consumer Price Index for All Urban Consumers (CPI-U).  Source: US Bureau of Labor Statistics. 

3. Year-to-date return for 2021 through June 30.

We thank Dimensional Fund Advisors for the source of this article. Here are some additional sources that discuss inflation

For a similar viewpoint, see Goldman's View on Inflation. 

For a discussion on why slightly higher inflation might be good, see Bloomberg - Is Higher Inflation Good?. 

For a recent discussion on whether the inflation is transitory and debate about what that means, see Transitory Inflation?. 

Regardless, the good news is that for those currently receiving Social Security, there will be a nice increase next year!  SS Blog