Stagflation
MacroDefinition
The ugliest combination in economics: the economy is shrinking (or barely growing) AND prices are rising fast at the same time. Normally when growth slows, inflation cools off too, and vice versa. Stagflation breaks that pattern and hurts most portfolios because stocks suffer from weak earnings while bonds get crushed by inflation.
The classic example was the US in the 1970s after the OPEC oil shock plus loose Fed policy. The assets that held up best were commodities, gold, and inflation-protected bonds (TIPS).
The classic example was the US in the 1970s after the OPEC oil shock plus loose Fed policy. The assets that held up best were commodities, gold, and inflation-protected bonds (TIPS).
Example
Imagine inflation prints 5% for the year while real GDP growth comes in at negative 0.5%. That is textbook stagflation. A 60% stocks / 40% bonds portfolio historically has had its worst years in this environment.
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