A Look Back at the 2021-2023 Inflationary Period

Inflation's Ticking Up: A Look Back at the 2021-2023 Inflationary Period

We're observing inflation creep upwards again. It had settled down to 2.4% year-over-year in September, but recent figures put it back at 3%. This 25% increase is a notable change, and it brings to mind the inflationary period of 2021-2023. Looking back at that recent surge, we can observe the performance of different asset classes, particularly in the context of the unique economic conditions of the pandemic, which influenced market outcomes.

Revisiting the 2021-2023 Inflationary Period: Observed Performance

Inflation began its climb at the start of 2021, rising from a modest 1.4% to a peak of 9.1% before easing back to around 4% by May 2023. Analyzing the cumulative returns of various asset classes during this timeframe reveals some interesting patterns.

Conventional financial literature often describes real estate, bonds, and gold as typical asset classes to target for an inflationary period. The idea is that these assets have, in the past, demonstrated a tendency to hold or increase their value as the purchasing power of a currency declines. However, the 2021-2023 period presented a different set of outcomes.

Oil's Performance: A Rebound Story (IEO - iShares U.S. Oil & Gas Exploration & Production ETF)

The standout performer, by a significant margin, was oil. It experienced a gain of over 100% during this period. It's crucial to remember the context: oil prices were recovering from historically low levels. The pandemic had severely reduced demand, leading to a dramatic price drop. So, a significant portion of this increase represented a return to a more typical market level. This highlights the influence that specific economic drivers, in this case, supply and demand imbalances, had on asset performance during that particular inflationary period.

Dividend Stocks: Observed Stability (SCHD - Schwab US Dividend Equity ETF)

Dividend-paying stocks also demonstrated a degree of relative stability during this timeframe. While they didn't match oil's extraordinary gains, their performance was less volatile compared to other asset classes during that period. One factor contributing to this relative stability was that many companies with a consistent track record of paying dividends are often well-established businesses, some with the ability to adjust their pricing in response to rising costs.

The Underperformers: Gold and Real Estate (GLD & IYR)

Perhaps the most unexpected outcome was the performance of gold. Traditionally cited in financial literature, gold performed poorly during this specific inflationary period. This highlights the fact that no single asset class consistently reacts in a predictable way to every inflationary environment.

Real estate, another asset class often cited, showed a modest increase of around 5% overall during this time. While this was a positive return, it didn't keep pace with the peak inflation rate. It's worth noting that real estate is a highly diverse asset class, and performance can vary significantly depending on location, property type, and other factors.

Key Observations from the Recent Past

• Context Matters: The 2021-2023 inflationary period was heavily influenced by unique factors, including the pandemic, supply chain disruptions, and government stimulus measures. This makes direct comparisons to other inflationary periods challenging.
• No Guarantees: The performance of various asset classes during this period underscores the fact that there are no foolproof "inflation hedges." Past performance is not necessarily indicative of future results.
• Underlying Causes: The strong performance of oil highlights the influence that specific economic drivers had on asset performance.
• Company Fundamentals: The relative stability of dividend stocks during this time highlights how companies with certain characteristics performed in that specific environment.

You can download the sheet used to generate this data here.

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Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Past performance is not indicative of future results. Always do your own research and consult with a qualified professional if needed.