US consumer prices were up by 5.4% for the year ending June 2021, the largest annual increase since August 2008.1 Naturally, inflation is at the center of attention for many US investors.
Recent Dimensional research suggests that simply staying invested helps outpace inflation over the long term for a wide range of asset classes.
The protection offered by inflation-indexed securities still appears to be the most effective for investors who are particularly sensitive to unexpected inflation.
The analysis of data from 1927–2020 covers periods with double-digit US inflation as well as periods with deflation.
Dimensional’s recent paper US Inflation and Global Asset Returns provides some good news for investors looking to outpace inflation over the long term. But it also contains some sobering facts for investors trying to hedge against inflation through alternatives to inflation-indexed securities.
Exhibit 1 shows average real returns (that is, returns net of inflation) to different asset classes in years with high (above-median) inflation from 1927 to 2020 that considers 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. 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.
The analysis over 1927–2020 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, 1929–32). But there are also similar results over the most recent 30-year period (1991–2020), when US inflation was relatively mild and stable. Over this period, Dimensional also expand their analysis to non-USD bonds, developed- and emerging-market equities, real estate investment trusts (REITs), and commodities. Overall, outpacing inflation over the long term has been the rule rather than the exception among the assets studied.