You’re in a grocery store in 1970s America. A loaf of bread costs triple what it did last year; gas lines run down the block, and jobs? Good luck. Your paycheck buys less each month, but there’s no raise in sight—because the company you work for is laying people off, not hiring. That was stagflation, a rare economic punch many think couldn’t happen again.
Now, fast forward to today.
Inflation isn’t at peak levels anymore, but it’s still eating into purchasing power. Meanwhile, wage growth is sluggish, GDP growth is shaky, and layoffs in tech and retail are stacking up. So… what are we dealing with? Inflation? Recession? Something worse?
Let’s talk about stagflation—and what it could mean for your financial plan.
What Is Stagflation and Why It Matters
Stagflation is an economic predicament where inflation remains high while economic growth stagnates, often paired with rising unemployment. In simpler terms, prices of goods and services are surging (hurting purchasing power) even as business activity slows – a potentially brutal combination for investors. This rare phenomenon most famously hit the U.S. in the 1970s, and it’s back in conversation today as inflation spiked in 2021–2022 while growth cooled.
What’s the Difference Between Inflation, Deflation, and Stagflation?
Inflation occurs when prices rise across the economy, eroding the purchasing power of money over time. While challenging for cash holders and fixed-income investments, inflation can benefit real assets and companies with pricing power that can pass costs to consumers. Deflation is the opposite – a general decline in prices that makes money worth more over time but often signals weak demand and economic contraction. Stagflation combines the worst of both worlds: persistently high inflation alongside stagnant economic growth, creating an environment where prices keep rising even as business activity and employment decline.
Economic Conditions & Investment Impact
- U.S. inflation peaked at 9% in 2022 (highest in 40 years)
- Caused by supply chain disruptions, stimulus spending, and energy shocks
- Reduces value of fixed-income payments and cash holdings
- Consumers delay purchases expecting lower future prices
- Businesses struggle with falling revenues and fixed costs
- Often accompanies economic slowdowns or recessions
- Rising prices coupled with economic stagnation
- Often triggered by supply shocks (like energy crises)
- Challenging for central banks to address with traditional tools
A Look Back: Inflation in the 1970s vs. Recent Years
For those heading into retirement, stagflation poses a unique challenge. Traditional portfolios can stumble in this environment: stocks may languish, bonds might lose value in real terms, and economic malaise makes it harder for businesses to thrive. Understanding what happened in the 1970s and how different assets behaved can inform how we prepare our portfolios today.
The late 1970s marked the peak of the “Great Inflation” in the United States1. After relatively low inflation in the 1960s (~1–2% annually), prices began ratcheting upward due to factors like oil shocks and loose monetary policy. Inflation soared into double digits, reaching over 14% year-over-year in 1980. It took aggressive interest rate hikes by the Federal Reserve (under Paul Volcker) in the early 1980s to finally break the back of this inflation. By contrast, the following four decades saw inflation largely under control – until the aftermath of the COVID-19 pandemic.
In 2021–2022, stimulus-fueled demand collided with supply chain constraints, driving U.S. inflation to its highest levels since the early ’80s. In June 2022, CPI inflation hit 9.1%, the steepest annual increase since 19812. While unemployment remained low (preventing a full stagflation scenario), investors suddenly had to contend with 4-decade-high inflation eroding their purchasing power. The Federal Reserve responded with rapid rate hikes in 2022–2023, and inflation has since begun moderating (down to ~4% by mid-2023).
The figure below illustrates U.S. inflation rates from the 1970s through today. You can see the dramatic spike of the 1973–1982 stagflation era, when inflation (green line) stayed very elevated, and the more recent surge post-2020 (far right of the chart):
Figure 1: U.S. annual inflation rate (CPI, year-over-year). Green shaded areas highlight the stagflation period (1973–1982) and the recent post-2020 inflation spike. Source data: Bureau of Labor Statistics (BLS), via Federal Reserve FRED3.
As shown above, inflation in the 1970s was persistently high – over 6% for a full decade, with peaks above 11% in 1974 and 13% in 1980. This sustained surge decimated the real value of cash and bonds, and even stocks struggled to keep up with the general price level. By contrast, the 1983–2019 period saw inflation generally in the 2–5% range (hovering around the Fed’s 2% target for most of the 2010s). The right side of the chart highlights how quickly inflation spiked in 2021–2022, albeit from a low base – a reminder that stagflation risks, while still moderate, are not just theoretical.
How Key Asset Classes Performed in Stagflation
For investors, the stagflation of the 1970s was a trial by fire. Traditional stock/bond portfolios underperformed badly in real terms as both asset classes were pummeled by surging prices. Meanwhile, hard assets and certain equities provided havens. Let’s examine how major asset classes fared during the 1973–1982 stagflation period:
U.S. Equities (S&P 500)
Stocks delivered dismal returns after inflation. Over 1973–82 the S&P 500’s total return was slightly positive in nominal terms, but about –2% per year when adjusted for inflation. In other words, an equity portfolio lost roughly 20% of its purchasing power over that decade. It truly was a “lost decade” for stocks– deep bear markets in 1973–74 and 1981 wiped out most nominal gains. Corporate earnings did grow through the ’70s, but valuations contracted severely as investors would no longer pay high multiples in an inflationary environment. 4 5
Bonds (10-Year US Treasury)
Long-term bonds, normally a safe haven, were even worse in real terms. Bond investors suffered about –3% per year after inflation over 1973–82. Rising interest rates (the 10-year Treasury yield jumped from ~6% to ~13%) caused bond prices to plunge, and high inflation eroded the value of their fixed interest payments. Anyone holding long-term Treasurys in the 1970s saw their real wealth shrink each year. (Notably, short-term, low-duration government debt did better – short-term Treasury bills roughly kept up with inflation, netting about 0% real return. Parking in cash at least preserved purchasing power, whereas longer-duration bonds lost value.)5.
Gold and Commodities
Gold was the standout winner of stagflation. Freed from the gold standard in 1971, gold prices skyrocketed as investors sought an inflation hedge. From 1970 to 1980, gold went from about $35/oz to around $850/oz – a 2,300% explosion in nominal terms (over 9% annualized after inflation). Gold’s real return was about +9.2% per year in 1973–82, handily outpacing inflation. Broad commodities also excelled: for example, energy and raw materials spiked with the oil crises. A basket of commodities (S&P GSCI index) delivered a staggering +586% total return over the 1970s. (Of course, once inflation was wrangled, commodity prices flattened out – the same index returned just ~2% annually in the early 1980s) The key takeaway is that tangible assets – precious metals, oil, agriculture, etc. – tended to thrive during stagflation, albeit with high volatility.456
Real Estate
Real estate proved to be a partial inflation hedge. Property owners benefited as home prices, commercial rents, and farmland values climbed along with the general price level. For instance, REITs (Real Estate Investment Trusts) generated about +13.2% nominal annual returns, or +4.5% real, during 1973–82. Certain segments like farmland did even better (farmland values rose ~14% annually in the ’70s, outpacing inflation). Real estate’s performance varied by region and property type, but overall, it provided solid positive real returns when stocks and bonds did not.45)
The figure below shows the inflation-adjusted annual returns for five asset classes during the stagflation era (1973–1982). Equities and bonds had negative real returns (below 0% on the chart), while gold and real estate enjoyed strong positive real returns. Ultra-short-term T-bills was roughly flat in real terms:
Inflation-adjusted annual returns for various asset classes during the stagflation of 1973–19825. Equities (S&P 500) and 10-Year Treasuries had negative real returns, while Gold and Real Estate delivered positive real growth. “Cash” (T-bills) roughly broke even with inflation. Data source: Morningstar/CAIA analysis of 1973–82 returns.
Gold was by far the best-performing asset in stagflation, with ~9% real annual returns. Real estate (property/REITs) also provided a decent real return (~4.5% annually). In stark contrast, stocks and bonds both lost purchasing power – the classic 60/40 portfolio would have struggled mightily in that environment.
This underscores that diversification across asset classes is crucial. Assets that tend to lag in normal times (e.g., commodities or precious metals) can shine when inflation runs rampant. Conversely, assets that dominate in low-inflation periods (growth stocks, long-term bonds) can falter during stagflation.
Portfolio Implications: Preparing for a Stagflation Scenario
For today’s investors, the 1970s teach us both what can happen and how to prepare. While full-fledged stagflation (high inflation and high unemployment) hasn’t hit – U.S. unemployment is still low – we have experienced the “inflation” part recently. If growth were to stagnate while inflation stays elevated, portfolios should be ready to weather the storm. Here are a few implications and strategies:
Potential Stagflation Portfolio
Consult with a Financial Advisor
The best offense is a good defense. In a stagflation scenario, your key goal should be to preserve what you have, and with the risks so high, going it alone would be a recipe for disaster. An advisor can help you navigate these complex waters with a strategic approach that goes beyond basic asset allocation. They can analyze your specific situation to identify hidden inflation risks in your portfolio, recommend tactical adjustments as economic conditions shift, and help you avoid emotional decisions during volatile periods.
Diversify Beyond Traditional 60/40
Relying solely on stocks and long-term bonds could be risky if stagflation returns. It’s wise to include assets with different inflation sensitivities. For example, a modest allocation to real assets (commodities, gold, real estate) can hedge against unexpected inflation spikes. In the 1970s, these assets preserved wealth when stocks/bonds struggled – a compelling case for diversification.
Maintain Purchasing-Power Focus
For those in or near retirement, stagflation is especially dangerous – it can rapidly erode the real value of income streams. Focus on investments that generate rising income or appreciate alongside inflation. Examples include rental property income, dividend-growing stocks (particularly in sectors like consumer staples or utilities that have pricing power), and inflation-indexed bonds (like TIPS). These can help sustain your purchasing power if living costs keep climbing.
Stay Nimble with Fixed Income
In stagflation, cash and cash equivalents like short-term debt may be king for fixed-income investors. Keeping bond durations short can limit the damage if interest rates jump. During the 1970s, short-term Treasury bills outperformed long-term bonds because they could reset to higher yields faster. Today, similarly, one might favor shorter-duration bonds or floating-rate instruments when inflation risk is high. They won’t lock you into low rates while prices rise.
Don’t Chase Past Winners Blindly
While adding some inflation hedges is wise, be mindful of valuations and regimes. Gold or commodities can soar in a crisis (as they did in the ’70s) but can just as quickly stagnate or reverse. For instance, after its 1970s surge, gold spent much of the 1980s–90s drifting lower. Use these assets as diversifiers, not core holdings – a small allocation can go a long way when they spike.
In Conclusion
In summary, stagflation is an extreme scenario that tests every investor’s discipline. We can’t predict with certainty if we’ll face a 1970s-style stagflation again. As the saying goes, history doesn’t repeat, but it often rhymes.
By studying the past, we learn to expect the unexpected. For those of us guiding family wealth or retirement funds, the lesson is clear: build inflation resilience into your financial plan before the storm hits. Holding a thoughtful mix of assets – including equities, quality bonds, and real asset hedges – can give you a fighting chance to protect and grow your wealth, even when the economy stalls and prices soar.
Want Us to Help Make Your Portfolio Inflation, Deflation, and Stagflation-Ready?
The warning signs are flashing, but there’s still time to prepare. At WealthGen Advisors, we specialize in building resilient portfolios designed to weather economic uncertainty. Our fee-only approach means you get unbiased guidance focused solely on protecting and growing your wealth.
Schedule your free consultation today. Let’s discuss how we can help protect your retirement from whatever economic challenges lie ahead.
Resources:
- https://www.federalreservehistory.org/essays/great-inflation
- https://www.pbs.org/newshour/economy/u-s-inflation-at-9-1-percent-a-record-high
- https://www.federalreservehistory.org/essays/great-inflation
- https://johnrothe.com/looking-back-at-the-1970s-which-areas-of-the-stock-market-did-well-under-stagflation
- https://caia.org/blog/2022/10/10/stagflation
- https://www.kiplinger.com/investing/economy/want-to-beat-stagflation-invest-like-its-the-1970s
