Stagflation is the dreaded mix of stagnant economic growth and rising prices, and it is no longer just a ghost from the 1970s. Signs of its return are creeping into today’s economy. Growth has started to slow, yet prices keep climbing. One primary reason for these troubling twin trends is President Trump’s recently enacted tariffs, which sparked the new trade war. As investors, we need to understand how these policies could fuel stagflation and consider how to protect our portfolios if this economic malaise takes hold.
For decades, Americans enjoyed relatively stable growth with low inflation. However, the landscape changed when the U.S. launched aggressive tariffs on imports under the Trump administration. The intent was to protect domestic industries and shrink the trade deficit. Instead, these tariffs act like a tax on American consumers and businesses. When imported steel, electronics, or everyday goods become more expensive due to duties, companies either absorb higher costs or pass them to consumers.
In short, tariffs push inflation up while pulling economic growth down, a recipe for stagflation. The idea behind the tariffs was to correct “unfair” trade imbalances. The president often pointed to the U.S. trade deficit as evidence that other countries were taking advantage of us. But viewing trade as a zero-sum scorecard is misleading.
Consider my fun and simple analogy: I run a perpetual trade deficit with my local grocery store. Every week, I buy groceries from them, and they never purchase anything from me. By the numbers, I’m losing in this exchange. The dollars keep flowing one way to the store. Yet this transaction clearly benefits me: I get groceries and necessities for my young family, and the store gets revenue. I would be foolish to demand the store buy some of my household items just to balance the ledger, or to stop shopping there because of this so-called deficit.
In the same way, America’s trade deficit with China means we receive phones, televisions, clothing, and countless other useful goods in exchange for our dollars. Both sides gain from voluntary trade. Imposing tariffs to force a balance is as counterproductive as charging myself extra for groceries to even things out. I’d just end up paying more without getting any richer. This grocery store analogy highlights why tariffs are an economic self-inflicted wound. Over time, such pressures can slow business investment and hiring While the cost of living rises. If both trends persist, stagflation sets in.
Stagflation isn’t just a theoretical concern; we’ve faced it before. In the 1970s, a series of blows hit the U.S. economy. Oil-exporting nations imposed an embargo that quadrupled oil prices virtually overnight, sending inflation into double digits. At the same time, economic output flatlined and unemployment climbed, creating a nightmare scenario. Traditional economic remedies failed: stimulating growth risked pouring fuel on the inflation fire while tightening policy to curb inflation threatened to deepen the recession. It took years and a lot of pain. including sky-high interest rates and two recessions to finally break the cycle.
That is the medicine to curb stagflation. It is not fun medicine.
Investors in that era learned some hard lessons. Stocks generally grow wealth over the long run and struggle to keep up with surging prices. Rising costs squeezed corporate earnings, and the major stock indexes essentially went nowhere once adjusted for inflation. Typically seen as safe, bonds fared even worse. Fixed interest payments lost value in real terms as inflation outpaced them.
Diversify into Commodities and Hard Assets: Resources like oil, metals, and agricultural products typically rise in price when inflation heats up. Owning a slice of the commodities sector through commodity index funds, mining stocks, or energy companies can provide a hedge. These assets tend to hold their value because they are becoming more expensive. Likewise, precious metals such as gold and silver have a long history as inflation hedges. They’re unlikely to lose their luster when currencies are weakening. Don’t expect a smooth ride (commodity prices can be volatile), but a moderate allocation here can help offset losses in other areas.
Rethink the Bond Portfolio: In a normal downturn, bonds are the go-to safe haven. However, when inflation is high, traditional long-term bonds can be a trap; they pay a fixed interest rate that might not keep up with rising prices, leading to a loss of purchasing power. If you need the stability of fixed-income assets during stagflation, consider inflation-protected securities which adjust payments based on inflation, or shorter-duration bonds that won’t lock you into low rates for long periods. Another option could be high-quality corporate bonds with shorter maturities or instruments like floating-rate loans that adjust with interest rates. The goal is to avoid being stuck holding low-yield paper as inflation climbs.
Facing the threat of stagflation, it’s easy to feel pessimistic. Indeed, an economy caught in the pincer of rising prices and stalled growth presents challenges for businesses, policymakers, and investors alike. The situation today carries a bitter irony: policies meant to strengthen the economy, like tariffs aimed at protecting industries, may end up weakening it.
While Washington battles over trade arrangements and tries to rebalance imports and exports with blunt tools, everyday Americans could pay the price in higher living costs and a tougher job market. As investors, we don’t have the luxury of changing these policies directly, but we can adapt to their consequences. There is a silver lining for the attentive investor. Turbulent times often create opportunities for those prepared to think differently. If inflation and slow growth do take hold, many will be caught off guard clinging to yesterday’s investment playbook.
In conclusion, stagflation is a formidable challenge, but it can be met with a level-headed strategy. President Trump’s tariff gambit may or may not achieve its political aims, but it has undeniably raised the stakes for investors by contributing to a more challenging economic backdrop. Savvy investors should respond by fortifying their portfolios rather than lament the return of this two-headed monster of stagnation and inflation. Just as you wouldn’t abandon a journey because of rough weather, don’t abandon your financial plan – adjust your sails instead. With a clear-eyed view of the risks and a nod to the lessons of history, you can keep your investments afloat and even thriving, no matter how turbulent the economic weather becomes.
Elliott Lipinsky
Attorney
Selma, Alabama
