In recent research, we wanted to examine how different asset classes have performed during periods of controlled inflation.
it ANALYSIS becomes especially important in light of the Federal Reserve's recent decision to cut interest rates by 50 basis points in September. The move was prompted by easing inflation and a desire to encourage maximum employment at a time when unemployment rate was climbing.
of Federal Reserve objectives a Personal Consumption Expenditures inflation range from 1.5% to 2.5% (2% “midpoint” target). In our analysis, we observed an approximate difference of 0.4 percentage points between the average consumer price index and the PCE.
Since July 1996, the Fed has informally used this 2% marker to determine whether inflation was under control. As such, we exported CPI data from YCharts from July 31, 1996, to the present to identify periods when the forward 12-month average CPI fell in the 1.9% to 2.9% range—roughly approximating effective with PCE 1.5%-2.5% of the Fed's target range.
The analysis also included two-month “transition” periods when the CPI first exceeded 2.9%, fell below that threshold the following month, and then maintained an average CPI within the target range for the following year.
This approach revealed six periods where the CPI was “in range” and stayed for one year. These periods included August 2018 – July 2019, February 2012 – January 2013, September 2006-August 2007, April 2003 – March 2004, March 1997 – February 1998, August 1996 – July 1997.
of discovery show that controlled inflation over a year tends to mean good things for portfolios. Stocks, in particular, have historically shown strong performance during these intervals of sustained inflation. Specifically, the S&P 500 stood out with the highest average return at 23.88%, followed closely by large-cap value stocks at 23.85%. The Russell 1000 rounded out the top three with returns of 23.82%, with large growth stocks not far behind, delivering an average return of 23.8%.
If the last Fed tapering was an insurance tapering and price stability is sustained, historically, this tends to lead to positive returns across the portfolio.
Jerome Taylor is a senior marketing analyst at YCharts