Inflation Affects Your Buying Power. But Investments??

Inflation and the stock market is a growing concern the last several weeks.

Should it be? Maybe.  I spent some time earlier this week and looked at the S&P 500 Total Return Index since 1960 with a view to understanding what has happened before. There is no expectation that the future will unfold as the past has done, but it’s a place to start looking.

Here’s what I found


Highest one year inflation — 1980 at 13.50%

The two next highest were 1979 at and 1981 at 11.3% and 10.3% respectively. That’s nearly 40% in three years.

That’s about the same as from 2004 to the end of 2021.

Ten year and longer inflation. As you might expect the 10 years ended in 1987 was the highest at average annual increase at 8.7%. The price level more than doubled

As you make the time periods longer the rates fall into a narrower range. Highest 20 year inflation was 1985 at 6.33%. 30 year was 1997 at 5.36%, and 40 year was 4.67% in 2007. By 2021 the 40 year rate was 2.82%. The 30 year rate was under 3% and so was the 20 year and 10 year rate. 2021 looks better because 1979 and 1980 are not in the calculation. 2022 should look better too. My retirement and estate planning model has been using 3% as the long term inflation rate. I have adjusted it a little higher for the future.

Biggest year over year increase from the rate the year before was 5.80% in 2021.the lowest increase in a year was -4.20% in 2009.

Does the rate change in long runs up? Is there  a lower rate the next year. In the past 20 years there were 11 where the second year of two had a lower rate of inflation. That is high compared to other 20 year periods. There were only 6 like that in 1960 to 1980. Increasing inflation over long periods is not common.

Moral – inflation over long periods seems to be 3% to 4% range.

Caveat – the way they keep score has changed several times over the 1960 to now period.

What about investments

I have not dug up numbers on the bond markets, but suffice it to say that rising interest rates will reduce the capital value of your bonds. There is not much room to go down like they did from 1980

The stock market is more of a challenge, but one thing is clear. The total return index beats inflation over longer periods. The average advantage over inflation is this:

10 year   –  6.21%

20 year   –  6.55%

30-year   –  7.26%

40-year   –  6.76%

Keep in mind this is total return minus inflation. Costs and taxes reduce it further. If you are thinking a real yield much higher than 4% you are likely in fantasyland

There are terrifying years that people have in the back of their minds. Suppose you graduated from university in 1965. You noticed the Index was at 294.42. You thought about investing but decided to pay down debt, start a family, buy a car, set some money aside for the college fund. It worked out pretty well and in 1982 you decided to look again. The real value of the index was 294.49. You didn’t give up much by not participating.

Long periods of higher than normal inflation has a very serious affect on your returns. Short periods are not harmful.

Where to go next.

2021 year over year inflation at 7% is the highest since 1981. There are not any others even close. There are only 6 of the forty years over 4% only one of which is over 5%.

We have almost no experience with enduring high inflation. How long can you wait to decide if it is enduring? What will you do if you decide it is? There may be some good news by then. Bonds might be paying good rates. But they are very taxable. There is no chance you can keep 4% after costs and taxes and inflation. But when we look at 1965 to 1982, making 0% after inflation, but before costs and taxes is not very good either. It is a puzzle but one you should start noticing.

The bit to take away.

Manage your expectations and be prepared to change course.

Help me please. If you have found this useful, please subscribe and forward it to others.

I build strategy and fact-based estate and income plans. The plans identify alternate ways and alternate timing to achieve both spending and estate distribution goals. In the past I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning, have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email to

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