Inflation is running hot, registering a 7.9 percent year-over-year increase as of February 2022, which now marks the most inflationary environment in the United States since the early 1980s. Although elevated inflation has occurred infrequently, it can and has persisted for longer than desirable, such as from 1973 through 1981.

Investors worry about inflation because it erodes real investment performance. For example, if your investment returns are 2 percent and the prices of everything around you also rise by 2 percent, then your “real” return was effectively 0 percent. In other words, you do not come out ahead, despite your 2 percent return.

Traditionally, investors have turned to gold, as a hedge, during periods of elevated inflation. Because gold is a real asset with fixed supply, investors consider it to be one type of investment that can maintain its value when inflation is elevated.

Many investors have overlooked art as a form of protection against inflation. Inflation averaged 9.3 percent from 1973-1981. During this period, equities were a laggard, while gold performed well. Nevertheless, art was an even bigger standout, with an average calendar-year appreciation of 33.2 percent.

NOT ONLY AN INFLATION HEDGE

After the global financial crisis, inflation averaged 1.7 percent from 2010 to 2020, as measured by the CPI. This was reasonably close to the Federal Reserve’s 2 percent target and can be thought of as a period of “normal” inflation. By contrast from 1973 through 1981, this normal inflation environment generated strong equity performance and weak gold performance, as investors might expect.

What about art? It went from looking like gold during the inflationary 1970s, to looking like equities during the normal 2010s. Gold was the laggard, while equities and art were the standouts.

ART AS STRATEGIC ASSET CLASS

Over the past year, inflation has risen from less than 2 percent to almost 8 percent. History has shown that while elevated inflation does not occur frequently, it has had a tendency to persist when it does occur. Historically, art has performed well not only in both normal and elevated inflation environments, but also on a relative and absolute basis. Much like equities and many other commonly held asset classes, art deserves to be part of investors’ portfolio construction considerations.

Allen Sukholitsky is chief investment officer at Masterworks.