By Tim Courtney, Chief Investment Officer

The word stagflation is starting to show up more in the news. The assumption is that both sides in that scenario, slower growth and rising inflation, are beginning to take hold. The current market pricing of economically sensitive assets, such as high-yield bonds and small-cap stocks, is not signaling an obvious deceleration in growth. Rather than weakening, both areas are outperforming the broader markets.¹ This is not what you would typically expect to see if investors were becoming concerned with a recession.

However, concerns over inflation may be showing up in the prices of Treasury Inflation-Protected Securities (TIPS), which are outperforming nominal Treasuries² and gold,³ commodities,⁴ and MLPs,⁵ which are well positive YTD. This certainly affects us as consumers, but we’d like to spend some time looking at how inflation affects us as investors.

The two greatest detractors to our investment returns are taxes and inflation. Taxes will vary by taxpayer, but on average, they may expect to pay 15% to 20% of their investment returns in taxes.⁶ Investors have some degree of control over how much of their growth is taxed, and proper attention to investments and planning can mitigate some of this cost.

Inflation has historically been a much greater detractor to returns. Since 1959 (the earliest data for M2 Money Supply data), the Consumer Price Index (CPI) has averaged about 3.7% per year.⁷ As consumers, we have very little control over how inflation affects us through our purchasing decisions. As investors, inflation silently wicks away the purchasing power of our returns.

We focus on inflation data beginning in 1959, when money supply statistics became available, given the direct relationship between money supply and inflation. Since then, money supply has grown 6.7% annually,⁸ while real Gross Domestic Product (GDP) growth has been closer to 3%.⁹ The difference between those numbers has shown up as inflation. Inflation over the last 6 years (2020-2025) has been 3.9% annualized, not too far off the long-term average.¹⁰

We sometimes think of inflation being more or less set at 2%. The Fed’s stated target inflation rate remains 2%, and for much of our recent history (2000-2019), CPI inflation was just over 2%.¹⁰ But there are reasons we may not see that 2% number return soon. One of the factors keeping inflation relatively low in the early 2000s was the globalization of supply chains to the lowest cost producer, a trend that has started to reverse.¹¹ And since 2020, our government spending has accelerated with no signs of reverting to pre-pandemic levels.¹²

In 1978, during a period of painful inflation, Congress passed the Humphrey-Hawkins Act and set a long-term goal of 0% inflation, with a target to reach that level by 1988.¹⁰ That target still exists as law, but alas, we remain well above it today. Inflation is a risk that investors must account for in their planning. Investors should ensure that their portfolios are positioned to address it. Cash and cash equivalents assets are more exposed to inflation risk over time, while stocks and real assets can be good inflation hedges. If you have questions about how inflation impacts your portfolio, please reach out to your advisor.

Sources:

1. Morningstar (4/12/26) – Bloomberg US Corporate High Yield Index (up 0.8%) vs. Bloomberg US Aggregate Bond Index (up 0.3%) and Russell 2000 Index (up 6.3%) vs. S&P 500 Index (down -0.1%)
2. MarketWatch (6/15/24) - Here’s when the inflation-fighting power of TIPS bonds and ETFs really kicks in
3. S&P Global (data as of 4/7/26) - S&P GSCI Gold
4. S&P Global (data as of 4/7/26) - S&P GSCI
5. S&P Global (data as of 4/7/26) - S&P MLP Index
6. Investopedia (11/17/25) - Capital Gains Tax: What It Is, How It Works, and Current Rates
7. FRED (data as of 4/7/26) - Inflation, consumer prices for the United States
8. FRED (data as of 4/7/26) - M2 (M2SL)
9. Statista (data as of 2025) - Annual growth of real GDP in the United States of America from 1930 to 2025
10. DFA Returns (12/31/2025) – US CPI Inflation
11. Kansas City Fed (2015) - Inflation in a Globalized World
12. Tax Policy Center (January 2024) - How did the fiscal response to the COVID-19 pandemic affect the federal budget outlook?
13. Federal Reserve History (11/22/23) - Full Employment and Balanced Growth Act of 1978 (Humphrey-Hawkins)
14. Investopedia (2/27/26) - The Impact of Money Supply on Inflation: Economic Theories Explained

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