Outpacing Inflation with Stocks
Inflation is back in the news of late, as the year-over-year change in the consumer price index is at the highest level since 2023 in the US which is the worlds largest economy. This may stoke fears of further inflation for many investors.
It’s important to note that expected inflation is incorporated into the expected returns demanded by market participants. To the extent inflation is expected to impact either future cash flows from an investment, or the discount rate applied to these cash flows, market prices adjust to compensate, resulting in positive expected real returns. This is borne out in historical data. Average real returns for the broad US stock market, based on the S&P 500 Index, have been positive even in years when US inflation was above the historical median. Average real returns for US small cap and small cap value stocks have been even higher, implying investors should not shy away from tilting toward higher expected return stocks even if inflation expectations are elevated.
We believe one way for investors to deal with inflation is to outpace it. Stocks have been a good way to do this historically, as the evidence from the US illustrates.
To review the diversification of your own investments feel free to get in touch.
In USD. US inflation is the annual rate of change in the consumer price index for all urban consumers (CPI-U, not seasonally adjusted) from the US Bureau of Labor Statistics. Nominal return is the rate of return on an investment without adjusting for inflation. Real return is the rate of return on an investment after adjusting for inflation. Real returns are calculated using the following method: [(1 + nominal return) / (1 + inflation rate)] – 1. The Dimensional indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment.
See “Index Descriptions” in the appendix for descriptions of the Dimensional index data.
S&P data © 2026 S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment.
Risks : Buying Investments can involve risk. The value of your Investments and the income from them can go down as well as up and is not guaranteed at anytime. You may not get back the full amount you invested. Information on past performance is not a reliable indicator for future performance. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. The views expressed here are subject to change without notice and we can’t accept any liability for any loss arising directly or indirectly from any use of it.
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