CPI Inflation Above 4%
High-inflation regime and asset allocation
Year-over-year CPI above 4% represents a high-inflation regime that changes optimal asset allocation. Historically, equities have delivered below-average real returns during high-inflation periods, while commodities and TIPS have outperformed.
What history says
Editorial commentary written by ALAN analysts. Figures cited below are analyst-authored context — they are not derived from the chart above and may reflect different windows or sources.
During CPI >4% periods, the S&P 500 has averaged ~7% nominal returns vs. ~11% in low-inflation periods. After adjusting for inflation, real returns are roughly zero.
Companies with current earnings and pricing power (value) outperform companies valued on distant future cash flows (growth) when inflation is elevated. The growth-to-value rotation in 2022 was textbook.
Every sustained inflation above 4% since WWII has eventually been resolved by Fed tightening. The question is whether that tightening causes a recession (1980-82, 2022-23 near-miss) or achieves a soft landing (mid-1990s).
High inflation quietly redefines 'safe' — cash and conventional bonds lose purchasing power even while their statements look stable — so review whether part of the bond sleeve belongs in inflation-protected securities. On the equity side, consider whether the mix leans toward companies with current earnings and pricing power, which have historically weathered these regimes better than long-dated growth stories.