A look at inflation and investment performance

Christian J. Galipeau

Christian J. Galipeau
Senior Market Strategist, 03/16/21

Investors are concerned about rising inflation going forward. We researched recent history to better understand how different asset classes perform during periods of increasing core inflation as measured by the Personal Consumption Expenditure Core Price Index. The Personal Consumption Expenditure Core Price Index (PCE) is the preferred measure of inflation for the Federal Reserve.


We looked back 50 years at every period where the PCE rose by 1% or greater. Exhibit 1 shows these periods along with the starting level and ending level of core PCE, how many months the core PCE data increased, and the yield range on the U.S. 10-year Treasury note during the period.

We then calculated annualized asset class performance during these periods across equities, fixed income, and commodities. Taking the analysis further, we also decompose asset class returns in the higher inflation periods of the 1970s and 1980s along with asset class returns in the lower inflation periods from the late 1980s through 2012.

The average increase in core PCE was 2.87% and the median increase was 1.67%. The economic conditions from 1973–1975 and from 1976–1980 led to the most significant upward pressure in core PCE. Following Paul Volker’s term as Chairman of the Federal Reserve, which began in 1979, the Fed has taken a more aggressive stance towards battling inflation through the use of monetary policy, which has contributed to significantly lower rates of inflation from 1980 to today.

On average, for the data going back to the 1970s, the periods where core PCE increased by over 1% lasted for 34 months, or just shy of three years. During these periods, U.S. 10-year note yields increased 1.32% on average and 0.49% on a median basis.

Asset class returns

Exhibit 2 shows the annualized returns across equities, fixed income, and commodities (Bloomberg Commodities Index was used as a proxy) for the full sample period. Asset class data prior to 1980 is somewhat limited. The average annualized returns across all asset classes are positive post-1980, when core PCE rises by at least 1%.

We also compared asset class returns in periods of rising inflation prior to the Volker Fed and after. Exhibit 3 shows the annualized returns of commodities, the S&P 500, U.S. 10-year notes, gold, and the U.S. dollar during the two periods of rising inflation in the 1970s. In both periods of higher relative core inflation, both commodities and gold significantly outperformed equities, U.S. 10-year notes and the U.S. dollar. At the same time, more traditional asset classes like stocks and bonds underperformed asset classes that were deemed to provide protection during periods of rising inflation.

From 1980 – 2012, core inflation was significantly lower relative to the 1970s and early 1980s as the Federal Reserve adopted a more aggressive stance toward fighting inflation through monetary policy. Exhibit 4 shows the annualized returns of all the asset classes. Additionally, we show performance of styles within equities (value and growth) as well as size (large cap and small cap). We observe positive annualized performance except for the U.S. dollar.

Exhibit 5 isolates equity performance post-1980. On average, the data show positive annualized performance across style, size, and emerging market equities.

Exhibit 6 isolates fixed income and commodity performance post-1980. The data show positive annualized performance across both fixed income and commodities, with gold delivering the strongest returns. Gold’s strong relative performance is likely explained by the U.S. dollar’s negative return during the period.


Researching periods where core PCE has risen 1% or greater provided insight into asset class performance over time. There have been six periods where core PCE rose by 1% or more. Over the full sample, only five “asset classes” have a long enough track record that can be fully evaluated: Commodities, as proxied by the Bloomberg Commodity Index, the S&P 500, U.S. 10 -year notes, gold, and the U.S. dollar. Since 1987, we were able to observe small-cap value and growth, large-cap value and growth, and investment grade and high-yield bonds. It wasn’t until the 1998 period that we could evaluate the performance of TIPS or emerging market equities.

We acknowledge that, despite a 50-year look back, we are dealing with limited congruency which makes performance assessment difficult. It is fair to question the “average” performance with a limited sample size.

Further, we are also measuring performance in periods of hyperinflation and more normalized inflation. Core PCE has averaged approximately 2.2% over the last 50 years but was significantly higher in the early 1970s and mid 1980s.

Here are the observations that stood out in the research:

  1. Over the full 50-year sample, core PCE rose for 34 months, on average.
  2. U.S. 10-year notes rose 1.32%, on average.
  3. Hyperinflation during the 1970s and 1980s, combined with a weak U.S. dollar, led to significant gains for commodities and gold during those periods.
  4. Over the full 50-year sample, gold, U.S 10 -year notes, and commodities had the strongest returns.
  5. Post-1980, among U.S. equities, small-cap value had the strongest average returns. All equity categories had positive returns.
  6. Post-1980, in U.S. fixed income /commodity asset classes, gold posted the strongest average returns. Except for the U.S. dollar, all categories recorded positive returns.
  7. TIPS were only observable for three periods where core PCE rose by 1% or greater. TIPS had positive returns in all those periods.
  8. Despite having staggered periods to measure performance, all asset classes had positive average returns from their measurable time frames, except for the U.S. dollar.

The views and opinions expressed are those of the author, are subject to change with market conditions and are not meant as investment advice.

For informational purposes only. Not an investment recommendation.