Inflation comes and goes.
In recent decades, inflation has been low. But many of us remember the years of high inflation in the 1970s and early 1980s. At some point inflation will return and, if the last four and a half decades are any guide, when it ticks back up, we will likely see a distinct change in the performance of several asset classes.
Over the past 46 years (from 1970 through 2015), the average rate of annual inflation (as an arithmetic mean) has been 4.12%, whereas the 46-year median change in the consumer price index () has been 3.29%. The average annualized growth rate of inflation has been 4.07%.
In this article, we focus on the median rate of inflation of 3.29% because it is less affected by the outlier high rates of inflation during the late 1970s. Plus, using the median rate of inflation allows us to divide the last 46 years exactly in half: 23 years with below median inflation and 23 years with above median inflation. This will facilitate the analysis of asset class performance during years of low inflation (those 23 years with below-median inflation) and during years of higher inflation (23 years with above-median inflation). The median rate of inflation during the “low” years was 2.38%; during the “high” years, inflation rose at a 4.65% rate as shown in Table 1.
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