By Gregg S. Fisher, Founder, Head of Research& Portfolio Strategy, Gerstein Fisher


Gerstein Fisher has been managing portfolios for institutional and private investors since 1993. In this article, Mr. Fisher looks at the evidence that inflation is on the rise and suggests how investors might best seek protection.



  • Inflation updrafts and rising prices hits virtually everyone, but those on fixed incomes (like many care recipients) especially hard  


  • Inflation has been subdued globally since 2009, but some key measures of inflation have shown life recently.


  • Looking back in history, we can observe that commodities, gold, real estate, and emerging-market stocks proved to win when inflation rates were high and during periods of unexpected jumps in inflation.


  • While predicting inflation movements is hard, a well-diversified portfolio with an allocation to hard assets seems prudent.


“INFLATION IS AS VIOLENT AS a mugger, as frightening as an armed robber, and as deadly as a hit man,” declared Ronald Reagan in 1978, when the U.S. inflation rate was 9% and rising. If you remember the late 1970s and early 1980s, you recall watching the prices of basic goods climb almost daily—and shuddering at 30-year-fixed mortgage rates that spiked to 18½%.


We’re not expecting to see anything like that in the foreseeable future—but even moderate inflation can upset the lifestyles of those who need regular care, many of whom subsist on fixed incomes. For that matter, rising prices can crimp the spending patterns of nearly everyone, including caregivers as well.      


That said, a little inflation—in the 2% range or so—is usually a good thing, since it helps grease the economic wheels and keep wages rising. Indeed, for much of the time since the Global Financial Crisis bottomed out in 2009, the Federal Reserve and many other central banks around the world struggled to reach that number; most still haven’t.


Prices Tick Up

In the U.S., though, some prices and key measures of inflation expectations have sprung to life in recent months. For example, from June 2017 through late-January 2018, oil prices surged 54%, and the key broad-based commodities index gained 31%.


The economy is growing at a decent clip, the tax cuts should further stimulate growth, unemployment is at a low 4.1%, wages appear finally to be rising, and a weaker dollar should translate into higher prices for imports.


So if inflation is rising, what might investors do? To help answer that question, we reviewed more than 30 years of data about how different investment asset classes performed—under various inflationary environments.


We examined periods when inflation jumped unexpectedly and periods of low-, medium-, and high-inflation regimes.


Commodities Shined When Inflation Leaped

During periods of unexpectedly high inflation rates (as measured by the Consumer Price Index, or CPI), the winner was commodities—not surprising, since their prices typically respond quickly to inflation.


On average when inflation rose unexpectedly, commodities jumped nearly 28% over the following year. Other hard assets—gold and real-estate investment trusts, or REITs—also proved to be worthy hedges against inflation shocks.

But stocks from the world’s developing markets outperformed both gold and REITs, coming in with a one-year average return approaching 18%: more than twice as much as stocks from the U.S. and other developed markets.


The strong results in the emerging world reflect the heavy exposure that many of those countries have to natural-resource industries.


More on Comparative Performance

For our second study, we defined low inflation as a year-over-year CPI rate of less than 2.1%, moderate inflation as CPI growth of 2.1% to 3.2%, and high inflation as rates above 3.2%.


Many assets did best when inflation was at a moderate level—not surprising. But in high-inflation periods commodities once again took the crown, with an average 12-month return of 23.6%–though they suffered severe losses in low-inflation environments.


Second place was, once more, occupied by emerging-market stocks, which posted an average return of close to 19%.—but they also trailed U.S. and developed-international stocks when inflation was low. U.S. REITs and Treasury Inflation-Protected Securities (bonds indexed to inflation, known as TIPS) both posted double-digit returns when inflation was high—though REITs did much better in moderate-inflationary periods.


The Take-Aways

So what are investors to do? First, we urge them not to try to predict future inflation rates. It’s notoriously difficult to make accurate forecasts.


But since inflation—particularly when it comes in an unexpected burst—can play havoc with the performance of some asset classes, we think there’s a strong case for including some hard assets, such as commodities, gold, and real estate, in a diversified portfolio, along with a helping of emerging-market stocks.


For most investors, the allocations should be small. But we’d advise not ignoring these investment choices: Their typically protective features when inflation is high are, in our judgment, worth the trade-offs that come with them.


Whether or not caregivers or the people they tend to are investors, it’s wise for all concerned to keep an eye on inflation indicators, and prepare new spending and saving strategies if price increases become uncomfortable. No one should get caught unprepared in an inflation updraft.          




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