Stagflation Risk

Protect Yourself

April 03, 2025 • Estimated Reading Time: 5 minutes

Stagflation—a dreaded mix of stagnant economic growth, high inflation, and rising unemployment—poses a tough challenge for investors. Unlike periods of straightforward inflation or deflation, stagflation disrupts the usual playbook. Traditional equity markets often struggle, and fixed-income securities can lose value as real returns erode. Recent developments, particularly the introduction of new tariffs by President Trump on April 2, 2025, dubbed "Liberation Day," have heightened concerns about stagflation in the U.S. economy. 

🟣 Classic Stagflation Hedges

Asset

Why it Helps During Stagflation

Gold

Safe haven, inflation hedge, doesn't rely on economic growth. Historically strong in stagflation (think 1970s).

Commodities (Broad)

Input prices rise during inflation regardless of growth. Energy, metals, and agriculture tend to outperform.

Energy Stocks

Oil & gas companies can benefit directly from higher energy prices, which are often part of inflation spikes.

TIPS (Treasury Inflation-Protected Securities)

Government bonds adjusted for inflation. They won’t help with growth but protect the real value of your bond returns.

Commodity Currencies (e.g., CAD, AUD, NOK)

Countries whose exports are resource-heavy tend to hold up better when commodities rise during inflation.

Defensive Equities

Sectors like Utilities, Consumer Staples, and Healthcare hold up better since demand for their goods/services is relatively inelastic.

Real Assets (Real Estate, Infrastructure)

These have inflation-linked cash flows, though rising rates may offset some benefits. Quality assets with pricing power tend to fare better.

🟠 Less Reliable / Mixed

Asset

Notes

Nominal Bonds

Typically suffer because inflation kills their real returns, and stagflation may prevent central banks from cutting rates fast enough to help.

Growth Stocks

Generally hurt due to rising input costs, margin compression, and higher discount rates (if rates rise to fight inflation).

Emerging Markets

Mixed. Commodity exporters may benefit, but EMs with weak currencies, inflation issues, or dollar debt can struggle.

🔵 Bitcoin: A Potential Stagflation Hedge?

The crypto community loves to market Bitcoin as "digital gold," but when it comes to stagflation, the evidence is mixed at best.

✅ The Bull Case (Why Bitcoin could be a stagflation hedge):

  • Limited Supply: Like gold, Bitcoin has a capped supply, making it theoretically attractive when inflation erodes fiat currency.

  • Distrust in Central Banks: Stagflation often erodes confidence in monetary policy — an environment where Bitcoin's anti-establishment narrative could thrive.

  • Global Liquidity Alternative: Bitcoin doesn't rely on a single economy or currency. In theory, if multiple regions face stagflation, BTC could be seen as a "neutral" store of value.

❌ The Bear Case (Why Bitcoin hasn't yet proven itself):

  • Highly Correlated with Risk Assets: Since 2020, Bitcoin has traded like a high-beta tech stock. Stagflation typically kills growth and speculative assets.

  • Liquidity Dependent: Bitcoin historically rallies in periods of abundant liquidity, but stagflation usually forces central banks to tighten, not loosen.

  • Unproven in Real Stagflation: BTC hasn't lived through a true stagflationary decade like the 1970s. Inflation spikes since 2021 have actually coincided with Bitcoin volatility and underperformance during rate hikes.

  • Institutional Adoption Still Early: A lot of holders are still speculators, not long-term hedgers. Their behavior may not be "hedge-like" when markets get ugly.

Historical Cases of Stagflation

The most cited example of stagflation occurred in the 1970s. This era saw major oil shocks, persistently high inflation, and sluggish economic growth across many developed economies. In the United States, for example, real GDP growth slowed dramatically, unemployment climbed, and inflation peaked above 13%. Equities struggled during much of this time, while gold experienced a meteoric rise. From 1971 to 1980, gold’s price surged more than tenfold, reflecting investors’ loss of confidence in paper currencies and their search for inflation hedges. Commodities like oil and agricultural products also performed well, highlighting their value in a stagflationary environment.

Risks of Holding USD in a Stagflationary Period

Traditionally, the U.S. dollar has been considered a safe-haven asset. However, during stagflation, its reliability can falter. If inflation outpaces the yield on dollar-denominated assets, the real value of USD holdings erodes. The 1970s provided a case in point: as inflation soared, the dollar’s purchasing power dropped significantly. While the dollar may still serve as a relative safe haven compared to weaker currencies, it may not protect wealth effectively in absolute terms.

🟢 Summary Rule of Thumb:

In stagflation, you want stuff people need, not want — and preferably stuff that’s scarce when prices rise.

In Summary

Stagflation presents unique challenges, but by looking at historical precedents and understanding the characteristics of various asset classes, investors can make more informed decisions. Traditional hedges like gold, commodities, and certain types of real estate have a track record of weathering the storm. Bitcoin, while intriguing, has not yet proven itself as a reliable hedge, though it could evolve into one over time. Relying too heavily on cash or USD holdings may leave a portfolio vulnerable to inflation’s stealthy erosion of wealth.