During the 1970’s there was a significant increase in inflation in the US and the UK which made interest rates rise, thus damaging long term bonds. Gold’s price rose during the 1970’s and was the best asset during that era. Stocks spent the inflationary era of 1966 to 1982 going down 50% and then their prices returned to their starting points after a 16 year bear market, so on a nominal price return basis investors made no gains, however they did get dividends.
Could this time be different where yields are repressed by central banks and not allowed to rise in tandem with inflation? There was a precedent for that in the UK in the 1970’s the real rate of interest was deeply negative instead of being allowed to float up in tandem with inflation. However that was during the rule by the Labour party with currency controls, etc. so that era can’t be compared to modern era of economic freedom, despite today’s era of central bank manipulation.

   Dr. Lacy Hunt, who used to be an economist at the Fed, has repeatedly said that excessive debt acts to suppress consumption and growth, thus dampening inflation. My opinion is that there is an era, a huge generational tidal wave, where EM country workers continue to export low cost goods into Developed countries, causing underemployment and thus disinflation in the U.S. Couple that with excessive debt and it seems likely that inflation will be suppressed. Japan and the EU have been unsuccessful in trying to create inflation in their countries, so this may also happen in the U.S.
If stocks are now high priced at roughly double fair value then they are not a place to protect from inflation, since they need to drop in price 50% to reach fair value. Short term bonds might work the best since the bond market may respond to rising inflation by making the yield on new issues higher so as to reflect rising inflation. However, if the central banks wanted to, they could force rates to be artificially low.
If central banks create artificially low yields then insurance companies, annuities, pensions will all become disfunctional and these institutions could lobby Congress to rein in the Fed. The Fed was created in 1913 to solve and prevent banking crisis. Yet now central banks that have negative yields are creating a new systemic crash risk as they undermine banks and insurance companies with negative yields. At some point Congress may put a stop to this. Nothing lasts forever, eventually central banking’s wrong-headed policies of negative yields and QE will be discredited and the negative yield policies will stop. When people see that QE and low rates mainly helped wealthy stock market investors then the political winds will shift and central banks may become the whipping boy, used as a distraction by politicians. If leftists get elected the tax increases they will institute will be deflationary; if aggressive deficit spending goes out of fashion then there will be less stimulus and thus less inflation.
While waiting for this to stop, what should investors do to protect themselves: diversify into precious metals, which can sometimes go up even during deflation if there is a climate of panic. Avoid risky investments such as average quality stocks. Beware that chasing after dividend yield while losing 50% of the value of one’s stocks is not something that you should seek to do. Avoid junk bonds and instead focus on quality investment grade bonds. Avoid bonds that can be refinanced as you will then lose your bonds with good yields and have to reinvest at lower yields if rates keep dropping. Muni bonds when newly issued often have a 10 year call protection and Treasuries usually can’t be called at all. Commodities may not be a safe haven against inflation if there is also a secular demographic tide of less use of them and a secular economic trend of an ever more efficient, cheaper cost to extract commodities. If society becomes poorer as result of having too much debt then society will have to reduce consumption of commodities and thus I don’t expect a repeat of the 1970’s inflation. The 1970’s inflation was mainly caused by labor markets and a lack globalization. That era has no comparison with the modern era of ruthless U.S. employers destroying union shop jobs and shipping work out to the rural south or offshore. A new era of even cheaper imported goods will occur as the U.S. discourages imports from China then factories will move to cheaper frontier markets like Burma or Ethiopia. As foreign currencies weaken even more against the dollar this will trigger recession in EM countries resulting in even more subsidized make-work export industries exporting cheaper goods to the U.S.
The big future problem for the globe is not inflation but rather it is the disinflationary risk of excess debt, excessive global export competition, along with a demographic tide of lower population growth that is a source of a global low growth economy. Assuming China’s era of high growth is over then global economy will enter an era of lower growth, yet the world has far higher debts than that of 20 years ago.
Investors need independent financial advice about the risks of inflation and the risks of a deflationary stock crash.