The impact of higher inflation on US asset class returns – The Property Chronicle
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The impact of higher inflation on US asset class returns

The Professor

Which US asset classes perform best or worst amid periods of high inflation (6% or more)? Answer: commodities perform best, while bills perform worst. It’s commonly recognised that bonds are not a good inflation hedge – and they aren’t – but less recognised is that equities also fail in this regard; each has returned only a bit more than bills amid periods of higher inflation.

With the US CPI up by 6.9% over the past year – the highest rate since 1982 — have US asset returns reflected this longer-term history? Mostly, but not perfectly. Figure One illustrates how commodities have outperformed all other assets over the past year (through November, the latest available CPI data), with a real gain of 46%. Bills have lost 6.2%, also consistent with the history.

The outlier is equities, which have gained 19.7% in real terms. This is contrary to history. Why? Probably because the Fed until recently chose not to ‘chase’ the higher inflation rate with rate hikes; yet this month it hinted that it would raise rates three times (by 75 basis points) in 2022.

Now consider the longer-term history. Figure Two shows that commodities have materially outperformed equities (13.2% versus 1.8%) under periods of high inflation (averaging 6.7% pa) while significantly underperforming (by -35.7% points pa, or -19.3% versus 16.4%) amid low inflation (average: 1.0% pa). Equities have returned far more (16.4% pa) under episodes of low inflation versus 9.1% pa under moderate inflation and only 1.8% pa under high inflation. Meanwhile, bonds have returned 7.7% pa under low inflation, 5.7% pa under moderate inflation and just 0.9% points pa under high inflation.

The Professor

About Richard M. Salsman

AIER Senior Fellow Richard M. Salsman is president of InterMarket Forecasting, Inc and a visiting assistant professor of political economy at Duke University. Previously he was an economist at Wainwright Economics, Inc and a banker at the Bank of New York and Citibank. Dr Salsman has authored the books Gold and Liberty (1995), The Collapse of Deposit Insurance and the Case for Abolition (1993) and Breaking the Banks: Central Banking Problems and Free Banking Solutions (1990), all published by AIER, and The Political Economy of Public Debt: Three Centuries of Theory and Evidence (2017). His fifth book – Where Have all the Capitalists Gone? Essays in Moral Political Economy – was published by AIER in 2021.

Articles by Richard M. Salsman

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