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Outpacing Inflation with Stocks
Last month’s announcement of core Australian inflation prompted fresh concern among many investors that price pressures may prove more persistent than expected.1
It’s important to note that expected inflation is incorporated into the expected returns demanded by market participants. To the extent inflation is expected to impact either future cashflows from an investment, or the discount rate applied to these cashflows, market prices adjust to compensate, resulting in positive expected real2 returns.
This phenomenon is evident in historical data. Average real returns for the broad Australian stock market, based on the S&P/ASX 300 Index, have been positive even in years when inflation was above the historical median. Average real returns for value and small cap value stocks have been even higher, implying investors should not shy away from tilting towards higher expected return stocks even if inflation expectations are elevated.
We often say one way for investors to deal with inflation is to outpace it. Stocks have been a good way to do this historically.
Exhibit 1
Average Annual Real Returns in Years with Inflation Above the Historical Median
1982–2025
Past performance is not a guarantee of future results. Actual investment returns may be lower.
Footnotes
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1. See “Australia tops inflation rankings among all major developed economies,” Australian Financial Review, 5 July 2026 (Michael Read).
- 2. Real meaning in excess of inflation.
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The Dimensional Indices have been retrospectively calculated by Dimensional Fund Advisors LP and did not exist prior to their index inception dates. Accordingly, results shown during the periods prior to each index’s inception date do not represent actual returns of the index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains. Profitability is defined as operating income before depreciation and amortization minus interest expense divided by book equity. Asset growth is defined as change in total assets from the prior fiscal year to current fiscal year.
Dimensional Australia Small Value Index: January 1982–December 1989: Created by Dimensional from Bloomberg/ARC/CRIF securities data. Returns computed from the average of four staggered, market cap-weighted annually rebalanced portfolios of small-cap value company securities. REITs are excluded. Maximum index weight of any one company is capped at 10%. Country Included is Australia. Country Code AA January 1990–Present: Dimensional Australia Small Value Index: Consists of small cap companies in eligible markets whose relative price is in the bottom 35% of their country’s respective constituents, after the exclusion of utilities and companies with either negative or missing relative price data. The index excludes securities with the lowest profitability within their country’s small cap universe. The index also excludes those companies with the highest asset growth within their country’s small cap universe. Profitability is defined as operating income before depreciation and amortisation minus interest expense divided by book equity. Asset growth is defined as change in total assets from the prior fiscal year to current fiscal year. The index monthly returns are computed as the simple average of the monthly returns of four sub-indices, each one reconstituted once a year at the end of each quarter of the year. Maximum index weight of any one company is capped at 10%. The country currently included is Australia. Exclusions: REITs and Investment Companies Source: Bloomberg, ARC, CRI The Dimensional Australia Small Value Index has been retrospectively calculated by Dimensional Fund Advisors and did not exist prior to April 2008. Accordingly, the results shown during the periods prior to April 2008 do not represent actual returns of the Index. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains. The Index is unmanaged and is not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index. Past performance is no guarantee of future results. The calculation methodology for the Dimensional Australia Small Value Index was amended in January 2014 to include profitability as a factor in selecting securities for inclusion in the index. The calculation methodology for the Dimensional Australia Small Value Index (USD) was amended in November 2019 to include asset growth as a factor in selecting securities for inclusion in the index. Dimensional Index data compiled by Dimensional.
Dimensional Australia Marketwide Value Index: January 1982–December 1989: Created by Dimensional from Bloomberg/ARC/CRIF securities data. Returns computed from the average of four staggered, market cap-weighted annually rebalanced portfolios of value company securities. Utilities and REITs are excluded. Maximum index weight of any one company is capped at 10%. Country Included is Australia. January 1990–Present: Dimensional Australia Marketwide Value Index: Consists of companies whose relative price is in the bottom 45% of their country's companies, after the exclusion of utilities and companies with either negative or missing relative price data. The index emphasises companies with smaller capitalisation, lower relative price, and higher profitability, excluding those with the lowest profitability within their country's small cap universe. The index also excludes those companies with the highest asset growth within their country’s small cap universe. Profitability is defined as operating income before depreciation and amortisation minus interest expense divided by book equity. Asset growth is defined as change in total assets from the prior fiscal year to current fiscal year. The index monthly returns are computed as the simple average of the monthly returns of four sub-indices, each one reconstituted once a year at the end of each quarter of the year. Maximum index weight of any one company is capped at 10%. The country currently included is Australia. Exclusions: REITs and Investment Companies Source: Bloomberg, ARC, CRI The Dimensional Australia Value Index has been retrospectively calculated by Dimensional Fund Advisors and did not exist prior to April 2008. Accordingly, the results shown during the periods prior to April 2008 do not represent actual returns of the Index. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains. The Index is unmanaged and is not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index. Past performance is no guarantee of future results. The calculation methodology for the Dimensional Australia Value Index was amended in January 2014 to include profitability as a factor in selecting securities for inclusion in the index. The calculation methodology for the Dimensional Australia Marketwide Value Index (USD) was amended in November 2019 to include asset growth as a factor in selecting securities for inclusion in the index. Dimensional Index data compiled by Dimensional.
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