Does Inflation Really Hurt Stock Returns?

Although inflation has declined recently, it’s still top of mind for many. You 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 1993, one-year returns on US stocks have fluctuated widely. Stock returns can be strong, or weak, or in between when inflation is high. For example, returns were relatively strong in 2021 but poor in 2022.

Twenty-two of the past 30 years saw positive returns even after adjusting for the impact of inflation (see Exhibit 1).

Over the period charted, the S&P 500 posted an average annualized return of 7.0% after adjusting for inflation. Going all the way back to 1926, the annualized inflation-adjusted return on stocks was also 7.0%.

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.

Source: Dimensional Fund Advisors

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