Will Inflation Hurt Stock Returns? Not Necessarily.

June 23, 2023
Image of cash and scratch paper labeled "inflation"

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.

  • While 2022 saw high inflation and poor stock returns, there have been other periods with high inflation and strong stock market performance.
  • Twenty-two of the past 30 years saw positive stock returns even after adjusting for the impact of inflation.
  • Over the period charted, the S&P 500 posted an annualized compound return of 7.0% after adjusting for inflation.

Exhibit 1: The Real Thing

Annual inflation-adjusted returns of S&P 500 Index vs. Inflation, 1991–2022

 

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 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

History shows that stocks tend to outpace inflation over time—a valuable reminder for investors concerned about rising prices.

FOOTNOTES
  1. 1Real 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 © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
  2. 2Based on non-seasonally adjusted 12-month percentage change in Consumer Price Index for All Urban Consumers (CPI-U). Source: US Bureau of Labor Statistics.
DISCLOSURES

Adapted from Dimensional’s Will Inflation Hurt Stock Returns?  Not Necessarily.

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