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Stagflation is an economic condition that occurs when three factors are present:

The Atlanta Fed’s GDPNow forecast model estimates annual GDP growth of -2.4% as of April 9, 2025. Today’s University of Michigan Consumer Sentiment Index came in at 50.8, compared to 77.2 a year ago—a decline of 34%. This drop reflects growing pessimism among consumers. When people worry about the future, they tend to spend less, prompting companies to cut costs, further slowing the economy.

Inflation expectations have also increased. According to the University of Michigan, inflation expectations rose from 5% to 6.7% over the past 30 days — the highest level since 1981. Tariffs on goods are often passed on to consumers in the form of higher prices.

Additionally, 67% of people now expect unemployment to rise – the highest level of pessimism on record since 2009 (University of Michigan, April 11, 2025).

Given these indicators, one could argue that the risk of stagflation is quite high. So, what should investors consider in such an environment?

How to Invest During Stagflation

Your main goal as an investor during stagflation is to earn returns that at least keep up with rising prices.

Cash and Safe Income

If you’re holding cash for a rainy day, you might consider short-term U.S. Treasuries. The ETF ticker SHV currently yields 4.3% with minimal risk. It invests in U.S. government debt maturing within the next three months. This minimizes interest rate risk, but you are exposed to reinvestment risk – meaning the 4.3% return is not guaranteed if the Fed begins cutting rates.

The Fed’s Dilemma

Stagflation creates a challenge for the Federal Reserve, as it puts its dual mandate at odds:

In stagflation, the Fed faces a balancing act, navigating between inflation control and economic support.

Rising inflation, slowing growth, and increasing unemployment suggest stagflation may no longer be a distant risk. While the path forward is uncertain, investors can take practical steps to protect their portfolios by focusing on essential sectors, inflation hedges like gold, and safe, short-term income options. Staying diversified and informed will be key in navigating the challenges ahead.

References

Disclosures:
The analysis is based on historical data and future expectations that may not be correct. This paper was written as an opinion only. The data is not guaranteed to be accurate or complete. Please consult with your financial advisor before making an investment decision. Neither ECNFIN.COM nor its author is responsible for any damages or losses arising from any use of this information. Past performance doesn’t guarantee future results.

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