Stagflation: Understanding Its Impact on Stocks & Real Estate Markets

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March 20, 2025 at 07:07 PM

Stagflation occurs when an economy experiences both stagnant economic growth and high inflation simultaneously, creating a challenging economic environment that affects various investment assets differently.

Economic stagnation manifests through slow or negative GDP growth, rising unemployment, and decreased consumer spending. Meanwhile, inflation causes prices to rise consistently, reducing purchasing power across the economy.

The most notable stagflation period occurred during the 1973-74 oil crisis, when OPEC's oil embargo led to skyrocketing energy prices. This caused both economic slowdown and inflation in many Western economies, particularly affecting the United States.

Stagflation typically emerges from supply shocks, poor economic policies, or a combination of both. When production costs rise dramatically (like during oil crises) while economic growth remains low, businesses must either absorb higher costs or pass them to consumers, leading to stagflation.

During stagflation periods:

Consumer purchasing power decreases
Unemployment rises
Business profits decline
Investment returns often suffer
Traditional monetary policy tools become less effective

Investment Performance During Stagflation:

Stocks generally perform poorly during stagflation as companies struggle with higher costs and reduced consumer spending. Value stocks typically fare better than growth stocks.

Gold often serves as a hedge during stagflation, historically performing well when both inflation is high and economic growth is low. Its value tends to preserve purchasing power during these periods.

Real estate presents a mixed picture during stagflation: