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Which asset classes beat inflation after the pandemic? 

Posted By The Accumulator On In Passive investing,Investing | 5 Comments

What do we want? We want inflation protection, we want it now, and we want it, ideally, in a highly-reliable set-and-forget format please.

I’m a passive investor [1] after all, and I’ve been hunting for alternatives since the passive investor’s choice of inflation insulation – a short-duration index-linked bond ETF – had a [checks glossary of terms] ‘mare during the post-Covid CPI blow-up.

The purpose of this article, then, is to run through the list of other potential antidotes to see how they actually performed when prices boiled over.

We’ve previously looked at [2] the scale of defeat for short-duration index-linked bond1 [3] funds, and also the so-so performance of the most obvious replacement – a DIY portfolio of individual index-linked gilts [4].

Here’s a quick refresher via a chart:

[5]

Data from JustETF [6], Tradeweb [7] and ONS [8]. February 2025

As you can see, neither of our index-linked contenders actually kept up with inflation. Disappointing.  

Partly the problem was that inflation-linked bonds were saddled with negative yields going into the pandemic inflation. And partly that the subsequent rise in yields – from negative to positive – inflicted a substantial price hit. 

Today a portfolio of individual linkers looks a good inflation hedge [9] because they’re on positive yields. 

But assembling such a portfolio [10] requires some work. For many, it seems like an arcane and fiddly task – like building your own microcomputer [11] in the 1970s and ’80s. 

Isn’t there a BBC Micro, ZX81, or failing that, a VIC-20 of inflation containment you can just buy off the shelf? By which I mean a fund full of assets that eat rising prices for breakfast? 

We’ll answer that in the next six charts. They show how most assets that could be turned to as your chief inflation-tamer dealt with the money monster from October 2021 to year-end 2024.

Note: all returns in this article are GBP nominal, dividends reinvested.

Inflation vs money market funds

How did cash do, as represented by money market funds [12]?

[13]

Data from Heriot-Watt/ Institute and Faculty of Actuaries/ESCoE British Government Securities Database [14] and ONS [8]. February 2025

Cash was comfortably trashed.

For comparison, the annualised returns are:

Money market rates were positive versus inflation in 2023 and 2024, but not enough to make up the lost ground. What’s more, money markets have been a real-terms loser all the way back to 2009 (bar a 0.4% gain in 2015).

Cash is popular now. Rates are high and bonds burned [15] many investors. But money market funds have historically provided a flimsy inflation defence.

Inflation vs gold

Gold had a stormer. In fact, without wishing to ruin the surprise gold was the best asset in our round-up. (Oh dear, I’ve ruined the surprise!)

[16]

Data from The London Bullion Market Association [17] and ONS [8]. February 2025

Annualised returns:

Gold has a reputation as an inflation hedge. A distinction that’s surely been burnished by its recent performance.

But gold [18] isn’t really tethered to inflation.

Even the few years covered by the chart indicate it dances to a different tune. Inflation whips up in late 2021 and absolutely rages in 2022. However, we’re firmly back in the realms of standard-issue 2.5% inflation by 2024.

Whereas gold is on fire in 2024, does merely okay in 2023, and registers a 0.1% real terms loss in 2022.

Overall, gold holders can be very happy with their choice this time, but its future reliability remains an enigma.

It’s entirely plausible that gold is propped up in inflationary situations because many people believe it is an inflation hedge.

They take refuge in gold as inflation rates climb while bailing on asset classes that succumb to price pressure.

The problem is the lack of:

  1. A solid underlying theory which explains gold’s role as an inflation shield.
  2. A string of historical examples that provide convincing proof that gold withstands the heat when CPI melts-up.

Gold at least seems to thrive during periods of great uncertainty – and inflationary shocks do contribute towards a general sense of systematic instability.

Inflation vs commodities

Raw materials are part of the very physics of inflation itself. Can they help us?

[19]

Data from Bloomberg [20] and ONS [8]. February 2025

Annualised return:

Commodities scored a draw – precisely matching the rise in headline rates over the period.

However, there’s a canary in the coal mine relationship between commodities and high inflation.

Rising raw material costs feed inflation, which means that commodities prices have historically front-run UK CPI [22] by a year or so. If we zoom out to include commodities’ 28% gain in 2021, then we discover that the asset class did comfortably beat inflation after all.

There is also good evidence [22] that commodities have historically outperformed other asset classes when inflation flares up. I’ll dig into this in more detail soon.

The other point worth making is that commodities are highly volatile and negatively correlated with equities and bonds. Rebalance sharp-ish when commodity prices spike and you may earn a juicy rebalancing bonus for your trouble.

Inflation vs World equities

The next chart seems to be saying: forget all the fancy stuff, just focus on pound-cost averaging [23] and keep your head:

[24]

Data from MSCI [25] and ONS [8]. February 2025

Annualised return:

Equities slipped below inflation’s high-water mark in 2022 and 2023. Only to surface and rise like a continental crumple zone, once the price pressure subsided.

Historically equities have typically reacted to inflation like it’s an essential vitamin. The right dose keeps stocks – and the rest of the economy – humming. But too much and financial weakness, nausea, vomiting, and cramps follow.

Still, equities have always recovered quickly once inflation has returned to reasonable levels. We saw that again this time.

Perhaps young, resilient accumulators should forget about hedging inflation and focus on outrunning it [26].

Inflation vs all-comers

Just for fun, here’s everything piled into one uber bar-room brawl of a graph:

[27]

If your portfolio was this diversified then you could hardly have done much more. Here’s the full rundown of annualised results, along with cumulative returns in brackets:

Personally-speaking, the recent price spiral has profoundly reshaped my portfolio [28]. I have since sold my linker fund and bought individual index-linked gilts, gold, and commodities instead.

Hopefully that means that – in tandem with a chunky equity allocation – my portfolio is better equipped to meet future inflationary bow waves.

Still, if you go to an anti-inflationary arms fair, you’ll meet plenty of people willing to sell you on all manner of other solutions…

Inflation countermeasure or counterfeit?

Here’s a selection of oft-cited inflation-busters, charted over the same period as before only this time in ETF form:

[29]

Data from JustETF [6]

As a range-finder, an MSCI World equities ETF (cyan line) hits the right-hand side of the graph at the 39.5% mark.

Inflation itself would score 6% – about double the red real estate line.

WOOD, the global timber ETF (magenta line), trails the pack with a cumulative return of 1.2%. I looked at UK property, too, which was the only fund to post a negative return over the period.

The clear winner is the oil and gas equities ETF (blue line). Fossil fuel supply shocks are often a large component of unexpected inflation. You’ll recall that Putin invaded Ukraine in February 2022, and unleashed energy blackmail against Europe soon after.

I’ve also included an oil and gas commodity futures ETC (yellow line). Initially it leaps too, hedging inflation up to year-end 2023. But it was no inflation-beater beyond that, lagging CPI by the end of 2024.

It’s intriguing that infrastructure (orange line), real estate, and timber all enjoyed bounces in early 2022 as inflation bit hard. But only infrastructure maintained its momentum before falling behind inflation in 2023.

True, infrastructure was an inflation-beater again by the end of 2024. But it only delivered half the value of the MSCI World during the period.

Finally, the Momentum and Quality factor ETFs haven’t added anything new beyond extra squiggles on the graph. It’s only a short timeline, but their correlation with World equities is much more apparent than any link to inflation.

Over-inflated

Okay, ‘less is more’ is the phrase that always comes to mind after a strong bout of inflation – or to one of my posts. Once again I’ve failed to master the art of shrinkflation when it comes to Monevator word counts.

So next time I’ll dig deeper into the UK’s extensive historical archives of high-inflation episodes to see which asset classes held the line against successive waves of money rot.

Time to slap The Investor with an enormous wage demand!

Take it steady,

The Accumulator

  1. Colloquially known as ‘linkers’. [↩ [34]]