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Does High Inflation Hurt? Thumbnail

Does High Inflation Hurt?

With inflation surging, investors may wonder whether portfolio returns will suffer.

Fortunately, inflation isn’t necessarily bad news for investors.

While inflation can increase our cost of living and impact short-term portfolio returns, simply staying invested helps outpace the impact of inflation over the long term. 

What is inflation? Read our article here. 

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

Since 1991, one-year US stock returns have fluctuated widely. Yet weak returns occurred when inflation was low in some periods. Positive returns, even after accounting for the impact of inflation, were seen in 23 of the past 30 years. That was the case in the first six months of 2021, too.

Inflation & US Stock Returns

Annual inflation-adjusted returns of S&P 500 Index vs. inflation, 1991–June 2021

Past performance is no guarantee of future results. 

Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Copyright 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Over the period charted, US stocks (as represented by the S&P 500 Index) 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 US 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.

Do you know the difference between good and bad inflation? Read our next article here. 


Content provided by Dimensional Fund Advisors, LP and adapted by Open Window Financial Solutions, Ltd.

  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.