Will Inflation Hurt Stock Returns? Not Necessarily

January 2022

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 stock performance in the past three decades does not show any reliable connection between periods of high (or low) inflation and US stock returns.

Since 1992, one-year returns on US stocks have fluctuated widely. Yet weak returns occurred when inflation was low in some periods, and 23 of the past 30 years saw positive returns even after adjusting for inflation. (See Exhibit 1).

Exhibit 1

The Real Thing

Annual inflation-adjusted returns of S&P 500 Index vs. inflation, 1992–2021

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

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Over the period shown above, the S&P 500 posted an average annualized return of 8.1% after adjusting for inflation. Going all the way back to 1926, the annualized inflation-adjusted return on 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.

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FOOTNOTES

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.