A closer look at overlapping five-year periods between 1990 and 2025 for both U.S. and UK equities reveals that equities do not always keep pace with inflation—sometimes significantly underperforming it. For pension savers, this has real implications.

Equities vs. Inflation: The numbers tell a cautionary tale

Our analysis examined 36 overlapping five-year calendar periods between 1990 and 2025. In the U.S., equities underperformed inflation in 8 of these 36 periods—nearly one-quarter of the time.

UK equities fared similarly, with multiple instances of negative real returns, particularly during times of market disruption or inflationary spikes.

Many of these underperforming periods were not obscure or isolated events. They include well-known crises like the dot-com collapse (1998–2002, 1999–2003), the global financial crisis (2004–2008, 2005–2009), and more recently, the inflation surge following the COVID-19 pandemic and geopolitical instability.

These episodes are stark reminders that equity markets are vulnerable to both valuation risk and macroeconomic shocks, which can erode purchasing power over critical investment horizons.

Why this matters for pension funds

Pensions are, by nature, long-term obligations. But within the long-term investment period, there are shorter windows where inflation-adjusted returns matter enormously—such as the five years before or after retirement.

If these windows coincide with periods of equity underperformance, the consequences can be severe:

• Sequence-of-returns risk: Drawing income from a falling equity portfolio during high inflation can permanently impair a pension’s sustainability.
• Reduced purchasing power: Even positive nominal returns can result in real losses if inflation outpaces gains.
• Behavioural pressures: Investors may respond to short-term volatility by de-risking at the wrong time, locking in losses.

The case for a more balanced approach

Equities still deserve a place in a diversified pension strategy. Over the long term, they have historically outperformed other asset classes.

But relying on equities alone to provide inflation protection is demonstrably risky. A more resilient portfolio should consider:

• Inflation-linked bonds: Government-issued instruments like TIPS (U.S.) or index-linked gilts (UK) provide long term inflation protection.
• Real assets: Infrastructure, real estate, and commodities often have inflation-sensitive income streams or pricing power.
• Multi-asset strategies: Dynamic allocation across asset classes can respond to different economic regimes, including stagflation or deflation.

Final thoughts

The belief that equities are a perfect inflation hedge is grounded in long-term averages that mask significant short-term variability. For pension savers, especially those approaching retirement, understanding and managing this variability is essential.

Historical data from the past 35 years offers a clear warning: equities do not always beat inflation, and sometimes they fall well short.  (Indeed the data shows that over the last century, equities have failed to protect against inflation in 20% of time periods.)

Pension planning should be built on a foundation of evidence, not optimism. The goal is not just to grow wealth, but to preserve its purchasing power over the periods that matter most. And for that, equities alone may not be enough.

Author's note: If you are keen to learn more about investment principles,  I would recommend the seminal book  ‘The Intelligent Investor’ by Benjamin Graham.  Although the book was first published in 1949 the teachings stand the test of time.  The book has been described by Warren Buffet (in the Fourth Edition) as ‘by far the best book about investing ever written’.