Understanding Stagflation: What It Is and How to Prepare

April 15th, 2025

Stagflation isn’t something that comes around often in the U.S. economy, but when it does, it can send shockwaves through financial markets, policymaking circles, and household budgets alike. Here’s a breakdown of stagflation, what can trigger it, and what it might mean for your financial life.

What Is Stagflation?

Stagflation is the rare and tricky situation where inflation is high, economic growth is flat or shrinking, and unemployment is also elevated. The term itself is a mash-up of “stagnation” and “inflation,” reflecting that combination of weak growth and rising prices.

In a typical inflationary environment, central banks try to cool things down by tightening monetary policy—raising interest rates or restricting the money supply. But in stagflation, that playbook gets complicated. Fighting inflation might actually worsen unemployment, leaving policymakers with fewer good options.

How Does Stagflation Play Out?

Under normal conditions, when growth slows and job losses rise, consumer spending drops, which usually causes prices to fall. But during stagflation, prices keep rising despite a sluggish economy and job market. That puts extra strain on consumers who are already feeling the pinch.

What Sparks Stagflation?

There’s no single cause, but several economic factors have historically contributed to periods of stagflation:

Supply Shocks in Key Commodities

Major disruptions in supply or sudden spikes in demand for vital resources—like oil—can create inflationary pressure and stunt growth. A prime example: the oil crisis of the 1970s, when embargoes led to surging energy prices and economic slowdown.

Government Policies and Global Events

Changes in taxation, regulation, or monetary policy can all affect economic balance. Similarly, geopolitical conflict can disrupt trade, shift government spending priorities, or increase demand for specific resources, all without necessarily boosting economic output.

What Are the Personal Impacts of Stagflation?

Stagflation can touch just about every aspect of your financial life:

Your Money Doesn’t Go as Far

Even if your paycheck stays the same, high inflation erodes its value—what you can buy with $50 today might shrink noticeably. And with a tough job market, wage growth often lags behind.

Recession Risk

Stagflation can lead to or coincide with a recession. The combo of weak demand and high prices can drag down business profits, investment, and stock market performance.

Rising Interest Rates

In an attempt to contain inflation, the Federal Reserve might hike interest rates—raising borrowing costs across credit cards, mortgages, car loans, and student loans. But if unemployment is already high, raising rates could make job losses worse, creating a tricky balancing act.

Can Stagflation Be Reversed?

There’s no one-size-fits-all fix. In the late ’70s and early ’80s, the Federal Reserve tackled stagflation with steep interest rate hikes. That eventually curbed inflation but not without short-term pain. Other options include structural reforms or supply-side strategies aimed at boosting productivity and reducing costs for key goods and services.

Stagflation vs. Inflation

While stagflation includes inflation, they’re not the same. Inflation can occur in a growing economy—usually when interest rates are low, borrowing is cheap, and people are spending. That kind of growth tends to boost wages and job creation, even if prices rise. Stagflation, by contrast, happens when prices rise without growth—creating a much more painful scenario.

Stagflation vs. Recession

Although both stagflation and recessions involve economic slowdowns, they differ in key ways. Recessions are periods of declining GDP and are relatively common in economic cycles. Stagflation, on the other hand, adds inflation and unemployment to the mix—making it far more difficult to manage.

A Look Back: When Has Stagflation Happened Before?

The most notable stretch of stagflation in the U.S. occurred during the 1970s and early 1980s, largely triggered by oil price shocks due to geopolitical conflict in the Middle East. The sharp increase in oil prices pushed up the cost of goods and slowed industrial production, resulting in economic stagnation alongside soaring inflation.

How to Prepare Your Finances for Stagflation

Though you can’t control the economy, you can take steps to insulate your finances:

Beef Up Your Emergency Fund

Having a solid cash reserve is a smart move in any economic climate, but especially during stagflation. Aim to set aside three to six months of essential living expenses. If inflation is climbing, revisit those figures regularly to make sure your safety net keeps up.

Rebalance Your Portfolio

Stagflation can throw asset prices out of sync. Take time to review your investments and make sure they still align with your long-term goals. A well-diversified mix won’t eliminate risk, but it can help you weather volatile markets.

Explore Inflation-Resistant Investments

Certain assets tend to hold up better during inflationary times. Treasury Inflation-Protected Securities (TIPS) and Series I bonds, for example, offer returns tied to inflation. Commodities like energy, agriculture, and precious metals have also historically performed well when prices are rising. As always, make sure these choices fit into your broader strategy—and consider consulting a professional before making changes.

Bottom Line

Stagflation is a rare and complex economic scenario that poses real challenges, not just to governments and economists, but to everyday people managing their money. By understanding how it works and preparing in advance, you can make smart decisions that help safeguard your financial health—no matter what the economy throws your way.

Sources:

https://www.fidelity.com/learning-center/smart-money/stagflation

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

Rebalancing investing involves risk including loss of principal.  No investment strategy, such as rebalancing, can guarantee a profit or protect against loss.  Rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.