A. Yes, inflation has a significant impact on investment. The extent of impact varies with different investment products.
A recent study provides some of the insights. Since 1970, the median annual inflation rate has been 3.37% (measured by CPI). In order to understand how high and low inflation impact investments, the 44 years were divided into two groups, the 22 years with higher than 3.37% inflation and the other half with less than 3.37% inflation.
The chart below shows the Gross Returns and Net Returns (gross return minus inflation rate) of the different investment assets' performances.
The inflation-adjusted net performance of commodities was 18.31% during periods of high inflation — surprisingly close to the asset class’ 24.66% gross performance during periods of high inflation.
Among other asset classes, inflation-adjusted performance varied. The net performance of large- and small-cap U.S. stock is impressive when inflation is low (green bars) but dramatically lower in years when inflation was high (blue bars).
The net returns of U.S. bonds also suffered greatly when inflation was high. Notice that when inflation was high, U.S. bonds had gross returns of 7.4% but inflation-adjusted returns of only 2.18%. The real-world (net) performance of U.S. bonds obviously favors periods of low inflation and is hurt during periods of high inflation.
The Real Estate
The inflation-adjusted performance of real estate is also better during periods of low inflation, whereas gross returns were basically the same during high and low inflation.
What does this mean to an investor's portfolio performance? Please read our next blog post.