Portfolio Construction Insights

Can Past Inflation Cycles Prepare Us for What's Ahead?

February 25 2022

Trends from previous inflationary periods may help investors navigate the highest inflation since 1982.

Key Insights

  • According to the U.S. Bureau of Labor Statistics, the consumer price index (CPI) climbed 7.1% year over year in December 2021—its highest reading since 1982.
  • Our historical analysis of three periods of high inflation since 1972 indicated both U.S. equities and real assets performed reasonably well, but performance for many assets differed significantly between the first and second halves of the periods.
  • In light of history and the current market environment, equity investors could consider allocating to high-quality U.S. large-cap value and small-caps, international large-caps, and real assets.
  • Fixed income investors could increase exposure to higher-yielding sectors, diversify globally, and consider shorter duration strategies.

Inflation Reaches Highest Level in 40 Years

As measured by the consumer price index (CPI), the year over year percentage increase in inflation rose to 7.1% in December 2021—the highest reading since 1982. Excluding the volatile food and energy sectors, core CPI rose 5.5% year over year in December.

Inflation recently reached its highest level since 1982.

(Fig. 1) Consumer Price Index (CPI) and Core CPI, January 1970 through December 2021.

Consumer Price Index (CPI) and Core CPI, January 1970 through December 2021.

CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living. CPI-U stands for the Consumer Price Index for All Urban Consumers.

Sources: FactSet, U.S. Bureau of Labor Statistics.

Is this rise permanent or transitory? One camp argues that we’re entering a new long-term regime of higher inflation, while another believes inflation will recede once pandemic-related disruptions are resolved. A recent T. Rowe Price insight titled “The Great Inflation Debate” demonstrates the range of inflation views held by investors and our own portfolio managers.

Inflation and Asset Class Returns: A Historical Perspective

Today’s market is characterized by high valuations, low interest rates, compressed credit spreads, and the prospect of higher interest rates to combat inflation pressures. To help understand these conditions, we looked at mean asset class performance over three periods from the past 50 years that exhibited high inflation, which we defined as core CPI averaging above 3.9%.

While current inflation exceeds 3.9%, today’s cycle is still ongoing, and we excluded it from our analysis. We also note that the current fixed income environment differs markedly from previous inflation cycles, which also saw high interest rates. As a result, we excluded fixed income from our analysis.

We caution against extrapolating too much from a limited data set. Nevertheless, we believe performance during past inflation cycles may offer helpful insights for today’s investor.

As shown in Figure 2 below, U.S. equities and real assets as a whole performed relatively well over the full high-inflation performance periods. (For purposes of this discussion, real assets include commodities, real estate, and precious metals.) Precious metals—often viewed as a hedge against higher inflation—had the lowest average return.

Global equities and real assets equities performed well overall in high-inflation periods, while most asset class returns diverged between first and second halves.

(Fig. 2) Mean Annualized Asset Class Performance When Mean Core CPI Exceeded 3.9%, Full and Half Periods, October 1973 to April 1983, November 1983 to October 1986, and 1987 to January 1992.

Mean Annualized Asset Class Performance When Mean Core CPI Exceeded 3.9%, Full and Half Periods, October 1973 to April 1983, November 1983 to October 1986, and 1987 to January 1992.

Past performance is not a reliable indicator of future performance. Index and category average performance is for illustrative purposes only and is not representative of any specific investment product or portfolio.

*U.S. Large Caps = S&P 500 Index; U.S. Large-Cap Growth = Morningstar US Equity - Large Growth category; U.S. Large-Cap Value = Morningstar US Equity - Large Value category; U.S. Small-Caps = Morningstar US Equity - Small Blend category; International Large-Caps - Morningstar International Equity - Foreign Large Blend category; Commodities = S&P Goldman Sachs Commodity Index (GSCI); Real Estate = Financial Times Stock Exchange (FTSE) National Association of Real Estate Investment Trusts (Nareit) Equity Real Estate Investment Trusts (REITs) Index; Precious Metals = Morningstar Sector Equity - Equity Precious Metals category. Annualized Morningstar category performance is calculated on the average monthly return for that category, net of fees, and the underlying allocations are rebalanced monthly.

Sources: Morningstar Direct, Standard & Poor’s, FTSE Russell; analysis by T. Rowe Price. Please see Additional Disclosures following this narrative for more information.

We also looked at performance differentials between the first and second halves of prior inflation cycles. Importantly, most asset classes showed wide divergence between the halves.

U.S. large-cap value, U.S. small-caps, commodities, and real estate stocks outperformed U.S. large-cap growth and international large-cap stocks by a wide margin in the first half of the periods.

In the second half, however, U.S. large growth stocks and international large-cap stocks slightly outperformed U.S. large-cap value and U.S. small-caps. In the real assets space, real estate and commodities performed similarly in both periods. Precious metals were the weakest segment but performed better in the second half.

What Should Financial Professionals Consider Now?

In our view, a well-balanced and broadly diversified portfolio is essential.


  • Broad: Consider high-quality U.S. large-cap value and small-caps. International large-caps could add cyclicality and potentially benefit portfolios.
  • Real Assets: Real estate and commodities performed relatively well in past inflationary cycles, particularly in the first half. The precise timing of a potential investment does not appear critical given the smaller divergence in performance between first- and second-half results relative to broad equities..

Fixed Income

Amid still-low interest rates, compressed credit spreads, and expectations for higher interest rates in the months to come, this remains a challenging environment for fixed income.

  • Consider increasing exposure to higher-yielding sectors to offset interest rate risk. Floating rate bank loans could help mitigate inflation pressures.
  • Look at diversifying globally to seek yield and gain exposure to varying economic growth rates and interest rate cycles. Global multi-sector bond portfolios could be an option.
  • Consider shorter duration strategies, including shorter duration Treasury inflation protected securities (TIPS). It’s important to remember that changes in inflation may cause the yield on inflation-linked securities to vary substantially over time.

If you’re preparing your portfolios for high inflation, we can help. Supported by the multi-asset experience and global resources of T. Rowe Price, our integrated suite of Portfolio Construction Solutions is designed to address your portfolio construction needs and help position your practice for success.

Additional Disclosures

FactSet: Financial data and analytics provider FactSet. ©2022 FactSet. All Rights Reserved.

Frank Russell Company “LSE”: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2021. FTSE Russell is a trading name of certain of the LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication. The LSE Group is not responsible for the formatting or configuration of this material or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.

Morningstar: ©2022 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

S&P: Copyright ©2022, S&P Global Market Intelligence (and its affiliates, as applicable). Reproduction of S&P 500 Index in any form is prohibited except with the prior written permission of S&P Global Market Intelligence (“S&P”). None of S&P, its affiliates or their suppliers guarantee the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions, regardless of the cause or for the results obtained from the use of such information. In no event shall S&P, its affiliates or any of their suppliers be liable for any damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of S&P information.

Important Information

Risks: Fixed income securities are subject to credit risk, inflation risk, liquidity risk, call risk, and interest rate risk. As interest rates rise, bond prices generally fall. Investments in high yield (junk) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.

International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates and differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

This material is provided for general and educational purposes only and is not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the  needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. T. Rowe Price group of companies, including T. Rowe Price Associates, Inc., and/or its affiliates, receive revenue from T. Rowe Price investment products and services.

The views contained herein are those of authors as of February 2022 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

Portfolio construction services discussed are available only to financial professionals and not to the retail public.

T. Rowe Price Investment Services, Inc., Distributor. Art of Clean Up® and Asset Allocation Model Review are offered by T. Rowe Price Investment Services, Inc. Model Construction is offered by T. Rowe Price Associates, Inc. T. Rowe Price Associates, Inc. and T. Rowe Price Investment Services, Inc. are affiliated companies.

©2022 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

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