Facing Down Inflation

What asset classes offer the best performance during episodes of high and rising inflation? In their March 2021 paper entitled “The Best Strategies for Inflationary Times”, Henry Neville, Teun Draaisma, Ben Funnell, Campbell Harvey and Otto Van Hemert analyze performances of passive and active strategies across various asset classes during inflationary episodes in the U.S., U.K., and Japan over the past 95 years. They define inflationary regimes as follows:

• An episode begins when annual change in headline consumer price index (CPI) rises to 5% or higher.
• An episode ends when annual change falls below 50% of its trailing 24-month peak.
• Alternatively, an episode begins when annual change in CPI is above 2% but has fallen to less than 50% of its trailing 24-month peak, and then rises to at least 5%.

They exclude episodes shorter than six months. They also analyze alternative asset classes such as fine art and discuss crypto-assets as a potential inflation hedge. Using monthly CPI and various asset class returns in the U.S., UK and Japan during 1926 through 2020, they find that:

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