When investing, as in horror films, the most terrifying villains are the ones we thought were dead. Stagflation that economic nightmare of the 1970s characterized by stagnant growth paired with persistent inflation was supposedly dead and buried decades ago. But like any good movie monster, it’s clawing its way back to the surface, and Americans need to prepare for its return.
The warning signs are unmistakable. Despite the Federal Reserve’s aggressive rate-hiking campaign over the past two years, inflation remains stubbornly above target. February’s Consumer Price Index showed prices still rising at 3.2%, while previous months have delivered unwelcome upside surprises. Meanwhile, GDP growth has begun to sputter, at just 1.6% in the first quarter, down sharply from 3.4% in late 2023.
Even more alarming, the Atlanta Federal Reserve’s closely watched GDPNow forecast model has recently slashed its second-quarter growth projection. When the Fed’s regional banks signal economic deceleration while inflation persists, the stagflation alarm bells should be ringing loudly.
This toxic combination represents the classic stagflation recipe: prices rise faster than paychecks while economic momentum simultaneously loses steam. Conventional economic models struggle to address this scenario, as policies that fight inflation typically hamper growth, while growth-boosting measures often exacerbate inflation.
Stagflation is particularly pernicious because it confounds traditional economic remedies. When inflation and unemployment rise simultaneously, policymakers face an impossible choice between fighting one problem while exacerbating the other.
The warning signals extend beyond inflation and growth statistics. Federal agencies have begun implementing hiring freezes and initiating workforce reductions as budget pressures mount. The Bureau of Labor Statistics reported that federal government employment declined by 5,000 jobs in January alone, with more cuts potentially looming. These job losses contribute to economic stagnation without addressing the underlying inflation problem.
Meanwhile, fiscal austerity measures designed to address budget deficits have reduced government spending across multiple agencies. While necessary for long-term fiscal health, these spending cuts remove economic stimulus precisely when private sector growth is already slowing, amplifying stagflationary pressures.
Perhaps most concerning for millions of Americans is the resumption of student loan payments after a three-year pandemic pause. With average monthly payments of $200-$300, the Department of Education estimates that borrowers collectively face over $7 billion in monthly payments—essentially a massive consumer spending tax that dampens economic activity without addressing supply-side inflation drivers. For many households, these payments come on top of significantly higher housing costs, energy bills, and grocery expenses.
Labor markets offer another concerning indicator. Despite headlines touting low unemployment, job growth has slowed considerably. In contrast, wage growth hasn’t kept pace with inflation in many sectors. Companies are increasingly caught in a vise between rising costs and consumers unable or unwilling to absorb higher prices.
The roots of our current predicament are not hard to identify. Years of extraordinary monetary accommodation followed by trillions in pandemic stimulus created excess liquidity. Supply chain disruptions, geopolitical tensions, and energy price volatility fueled the fire. We’re left with an economy where growth is cooling, but prices refuse to follow suit.
For investors, the stagflation playbook requires a dramatic departure from conventional wisdom. The investment landscape of the next several years will reward those willing to adapt and punish those clinging to outdated strategies.
First and foremost, commodities deserve a prominent place in any stagflation-resistant portfolio. During the 1970s stagflation, the S&P GSCI commodity index delivered a staggering 586% return over the decade. Gold performed even more spectacularly, rocketing from about $269 per ounce in 1970 to over $2,500 by 1980.
Why do commodities shine in stagflationary environments? They represent tangible assets with intrinsic value that tend to rise with inflation. Hard assets become monetary safe havens when currencies weaken through policy interventions or economic uncertainty.
Treasury Inflation-Protected Securities (TIPS) also merit serious consideration. Unlike conventional bonds, which suffered brutal losses during the 1970s with approximately negative 3% annualized actual returns, TIPS adjust their principal value based on the Consumer Price Index. This built-in inflation protection can preserve purchasing power when conventional fixed-income investments crumble.
Investors should pivot decisively toward defensive sectors within equities—consumer staples, healthcare, and utilities. These industries provide essential goods and services people need regardless of economic conditions, and many possess the pricing power to pass inflation through to consumers. During past stagflationary episodes, U.S. consumer staples delivered average quarterly returns of +7.9%, while consumer discretionary stocks declined by 1.3%.
The dangers of stagflation extend far beyond investment portfolios. The most insidious aspect of stagflation is how it methodically erodes societal living standards. When prices rise faster than wages for extended periods, everyday purchases become increasingly painful. Essentials consume a growing share of household budgets, leaving less for discretionary spending, savings, or investments in the future.
The psychological toll shouldn’t be underestimated either. During the 1970s stagflation, consumer confidence plummeted to record lows as Americans believed economic malaise was permanent. This pessimism affected everything from marriage rates to entrepreneurship, creating a downward spiral of reduced risk-taking and investment precisely when the economy needed it most.
Stagflation particularly punishes those on fixed incomes especially retirees whose pension or Social Security benefits fail to keep pace with true living costs. It also penalizes savers, and those with traditional fixed-income investments, who watch their purchasing power diminish monthly.
For younger Americans already grappling with housing affordability challenges and now facing resumed student loan payments, stagflation compounds financial stress. Many millennials and Gen Z workers entered a labor market already characterized by stagnant real wages; persistent inflation threatens to erase what little progress they’ve made.
Businesses suffer, too, caught between rising input costs and price-sensitive consumers. Profit margins contract, leading to reduced hiring, investment cuts, and, in many cases, layoffs. Small businesses with less pricing power and financial cushion are particularly vulnerable, potentially leading to increased market concentration as only the largest firms survive.
Stagflation will eventually end through successful policy intervention or economic adjustment, but the transition may prove lengthy and painful. The 1970s stagflation persisted for nearly a decade before Paul Volcker’s Federal Reserve crushed inflation, with interest rates approaching 20%.
Today’s policymakers face a similar dilemma, but even higher debt levels constrain their options. The Fed has signaled reluctance to cut rates while inflation remains elevated, yet maintaining restrictive policy risks further dampening growth—the very definition of our stagflationary trap.
Preparation means building financial resilience for individuals: reducing high-interest debt, maintaining emergency savings, and seeking opportunities to increase skills and income potential. Homeowners with fixed-rate mortgages benefit from what amounts to an inflation discount on their housing debt, while renters may need to budget more aggressively as housing costs continue climbing.
Though difficult, stagflation is ultimately a surmountable challenge. Following the 1970s ordeal, America entered a period of extraordinary growth and prosperity. The pain of adjustment, while real, eventually gave way to renewed economic vitality. The same can happen again if we make the difficult choices necessary to restore price stability while fostering sustainable growth.
The stagflation monster may be back, but America has faced and overcome economic challenges throughout its history. By understanding the nature of the threat and taking appropriate actions both as individuals and as a society, maybe we can weather this economic storm and emerge stronger on the other side. The alternative of ignoring the warning signs until a crisis forces our hand will only prolong the pain and deepen the eventual reckoning. The time for clear-eyed assessment and deliberate action is now.
Whilst observing the questionable economic decisions of our elected officials, it seems that no one will bury stagflation back in the graveyard.