What should I invest in during stagflation?

While it isn't a good idea to move all of your assets out of the stock market during any economic downturn, it's important to know that the combination of stagnant growth and rising prices creates a difficult environment for the vast majority of companies. However, there are some stocks that could do quite well if stagflation arrives. Companies that provide essential products and services and have pricing power, such as utilities, grocery stores, food manufacturers, and healthcare providers could be smart ways to invest. Inflation-protected bonds can also be smart investments during stagflationary periods.

If there was such a thing as good inflation, "boomflation" would be it. Essentially, boomflation is the opposite of stagflation. It is inflation that occurs while unemployment is extremely low and economic growth is especially strong. For example, much of 2021 could be characterized as a period of boomflation. The average inflation rate for the year was 4.7%, but unemployment was steadily declining and GDP grew by 5.9%.

How did the 1970s period of stagflation end?

The main cause of the 1970s stagflation was an oil embargo, which not only sparked high energy prices but reduced economic activity by hurting productivity. There were other factors as well, such as a massive increase in the money supply during those years. The stagflation ended for two main reasons. Oil prices eventually came back down to earth, and, since energy costs are a big part of inflation, this naturally lowered consumer prices. The Federal Reserve ended up having to raise interest rates to more than 19% at one point to slow the economy down and control inflation.

Stagflation: What It Is, Causes, Expert Views

What Is Stagflation and What Causes It?

By Matthew Frankel, CFP – Updated Mar 11, 2025 at 9:35 AM EST

Key Points

Stagflation combines high inflation with slow economic growth and rising unemployment.
Raising interest rates to control inflation can increase unemployment, complicating policy decisions.
Persistent stagflation can force severe interest rate hikes, negatively impacting economic activity.

Stagflation is a term that comes from the words "stagnation" and "inflation." It is used to describe elevated inflation that is accompanied by slowing economic growth and high unemployment.

As an example, in 2008 unemployment spiked to 10% as a result of the financial crisis in the United States, but inflation was above 5% for much of that year and the economy was clearly in a recession.

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A graph outlining three causes of stagflation: slowed economic growth, increased inflation and increased unemployment. — Image source: The Motley Fool.

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Law of Supply and Demand

The law of supply and demand is an economic theory asserting that supply and demand will meet each other at a certain equilibrium price.

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Academic views on stagflation

The bottom line

High inflation isn't fun. Neither is high unemployment or stagnant economic growth. But when all of these things happen at the same time, it creates a particularly scary economic situation that leaves policymakers with some difficult choices. In stagflation environments, the Federal Reserve might be forced to raise interest rates to the point where it severely harms economic activity just to avoid hyperinflation.

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FAQs

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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