Can passive investing work during periods of high inflation?

For the last 40 years, we've had a systematic decline of inflation and interest rates. This is partly due to increased globalization, cheap labor, a "peace dividend", and cheap energy. As a result, markets have steadily trended up, and while there were crashes like the dot com or the 08 GFC, eventually the Fed was always able to step in to prop up assets since inflation was low.

Before this period, during 1966 - 1982, there was massive structural inflation, and the stock market went literally nowhere for 14 years. On an inflation adjusted basis, you would have lost money. No one was recommending to dollar cost average into a broad index, because it just didn't work. The incentive for a passive strategy simply didn't exist. In contrast to today's world, after 40 years of assets grinding higher as interest rates grinded lower, a psychological shift happened and the incentive for passive investing was born, as well as the rise of ETF's along with it.

With inflation now at 40 year highs and the Fed relentlessly raising interest rates, it seems impossible for an index ETF strategy to do well. Some might say as soon as we've dealt with inflation, things will go back to normal. Rates will go down, the market will go up, and all will be well.

The problem is, it doesn't seem that we're just going to slip back into a low inflation environment. We're dealing with deglobalization, geopolitical tensions, rampant inflation, and climate change, all of which is creating more competition for limited resources.

After Covid, the world realized it needs to onshore certain supply chains, and things like this along with Russia/Ukraine and rising tensions with China is having a deglobalizing effect, making input costs higher. In addition to these higher input costs, higher wages and Owners Equivalent Rent are proving to be sticky.

Jerome Powell said it appears we are entering "a new normal", referring to inflation being higher for longer, unlike the period from the last 40 years.

All of this seems to be the perfect recipe for another lost decade. One in which indexing simply does not work, and investors will be forced to become more active as the volatility of the world seeps into markets. $S&P 500 Index(.SPX.US)$ $Dow Jones Industrial Average(.DJI.US)$ $Nasdaq Composite Index(.IXIC.US)$ $SPDR S&P 500 ETF(SPY.US)$ $Invesco QQQ Trust(QQQ.US)$