Macro

Stagflation

Persistently high inflation combined with stagnant or contracting growth — the regime most hostile to both stocks and bonds simultaneously.

Definition

Stagflation breaks the standard policy tradeoff: cutting rates worsens inflation, hiking rates worsens growth. It typically follows supply shocks (energy, labor, commodities) that hit costs without boosting demand, leaving central banks with no clean response.

The 1970s remain the canonical example, when consecutive oil shocks combined with eroded Fed credibility produced a decade of negative real bond returns.

Why it matters

Stagflation is the regime in which diversified portfolios fail most completely. The hedges are non-obvious: real assets, commodity producers, and short duration.

Worked example

1973–1981: US CPI averaged ~9% with two recessions. Stocks were flat nominally, bonds lost ~30% real, and gold rose ~20× from $35 to ~$850.

Frequently asked

What causes stagflation?⌄

Supply shocks plus accommodative monetary policy that allows the inflation to embed in expectations.

What hedges work?⌄

Commodities, gold, short-duration TIPS, real-asset equities (energy, materials), and short long-duration bonds.

Is the late-2020s setup stagflationary?⌄

It has elements — supply fragmentation, fiscal dominance, tight labor — but real growth has held up better than the 1970s parallel implies.

What ends stagflation?⌄

A central bank willing to break demand (Volcker 1980) or a supply-side improvement that releases the cost pressure.

Track it on Market Ontology

breakeven-10y real-yield-5y

Related terms

Regime Change

Macro

Soft Landing

Macro

Fiscal Dominance

Policy

Central Bank Credibility

Policy

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