When we look back at 2025, a decade from now, we’ll think of how the first half of the year has been a rollercoaster for investors. We started the year with high hopes about the “tech rally” that carried investors through 2024, and were immediately punished with the largest one-day wipeout in US stock market history, a whopping US$600 million drop from Nvidia’s market value on 27 Jan.

Investors pushed on, however, only for President Trump and the US administration to announce globally-imposed tariffs on imports into the US, changing the free-trade market entirely and pushing the world towards a potential trade war. 

Since then, things have calmed down considerably, but the uncertainty felt by investors in the first half of the year is unlikely to fade anytime soon, with one word being thrown around more often than others, “stagflation”. 

A phenomenon that gained prominence in the 1970s, stagflation represents an economic anomaly. In the 70s, it was caused by a combination of high budget deficits, cuts in oil production and lowered interest rates. Could we see the same thing happen again in 2025?

What is stagflation?

Stagflation is an economic phenomenon characterised by the simultaneous occurrence of high inflation, stagnating economic growth, and elevated unemployment rates. This rare combination poses significant challenges for policymakers and investors alike.

Key characteristics of stagflation include:

• Persistently high inflation rates
• Stagnant or declining economic output (as measured by GDP)
• Rising unemployment levels
• Reduced consumer spending and business investment

While true stagflation remains uncommon, concerns about its potential resurgence have grown this year, with the US tariff situation. Factors such as supply chain disruptions, geopolitical tensions, and unprecedented monetary policies have contributed to inflationary pressures and economic uncertainty, raising fears of a stagflationary environment.

What causes stagflation?

Stagflation occurs when an economy experiences stagnant growth and high inflation simultaneously. Several factors can contribute to this challenging economic scenario:

Supply shocks

Supply shocks, such as sudden increases in oil prices or disruptions in global supply chains, can trigger stagflation. These events can lead to higher production costs, which companies may pass on to consumers, resulting in inflation. Simultaneously, these increased costs can reduce economic output and employment, causing stagnation.

Monetary policy missteps

Central bank actions can inadvertently contribute to stagflation. For instance, if monetary policy is too loose for an extended period, it may lead to excessive money supply growth. This can fuel inflation while potentially creating economic imbalances that hinder growth.

Other contributing factors

Additional elements that may cause stagflation can include:

• Structural changes in the economy, such as shifts in labour markets or industry regulations
• Declining productivity growth, which can limit economic expansion
• Persistent government budget deficits, potentially leading to currency devaluation and inflationary pressures

Global economic implications of stagflation

Stagflation hits individuals hard, as their hard-earned money buys less due to soaring prices and job prospects dwindle and wages stagnate. This widespread household distress, however, is merely a symptom of a much deeper, systemic economic challenge. 

The very forces causing this suffering cripple a nation's ability to compete globally. Businesses face higher operational costs, making their exports uncompetitive internationally. Simultaneously, the currency of a stagflation-stricken economy inherently loses value against other countries, as inflation erodes its intrinsic worth and the lack of growth offers little incentive for foreign investment. This devaluation, while potentially making exports theoretically cheaper, often exacerbates domestic inflation by increasing import costs.

Central banks also face a difficult dilemma, making monetary policy unpredictable and leading to increased currecny volatility and a “flight to safety” towards strong currencies. 

The potential for economic contagion is a significant concern. As major economies struggle with stagflation, the ripple effects can spread to their trading partners and beyond. Some other repercussions include:

• Disrupted supply chains
• Reduced foreign direct investment
• Heightened global economic uncertainty

These factors can contribute to a slowdown in global economic growth, potentially leading to a prolonged period of economic stagnation across multiple regions.

Key differences between stagflation and inflation

While inflation and stagflation both involve rising prices, they differ significantly in their economic context and impact on investments. 

Inflation typically occurs during periods of economic growth, where increased demand drives up prices. In contrast, stagflation combines high inflation with stagnant economic growth and high unemployment—a more challenging scenario for investors.

During inflationary periods, certain assets like equities and real estate often perform well as companies can pass on higher costs. However, stagflation can erode corporate profits and depress consumer spending, potentially leading to poor stock market performance.

Bonds react differently, too. In inflationary times, bonds may struggle as rising interest rates decrease their value. Yet, during stagflation, high-quality bonds could provide a safe haven amid economic uncertainty.

Key differences between stagflation and recession

Stagflation and recession are two distinct economic phenomena. Stagflation occurs when high inflation coexists with stagnant economic growth and high unemployment. In contrast, a recession is characterised by a significant decline in economic activity, output, and employment.

Recessions are often triggered by demand-side factors, and stagflation typically results from supply-side shocks coupled with expansionary monetary policies. During stagflation, consumers face the double burden of high prices and weak economic growth, eroding their purchasing power. Recessions, however, may lead to lower prices due to decreased demand.

Stagflation is often considered worse because it presents a complex challenge for policymakers. Central banks must balance controlling inflation with supporting economic growth, making traditional recession-fighting tools less effective.

Different asset classes may perform differently in these scenarios. Commodities and real assets might fare better during stagflation, whilst fixed-income and defensive equities could be more suitable during a recession.

Effects of stagflation on your investments

For investors, traditional safe-haven assets like bonds may struggle as rising interest rates erode their value. Treasury bonds, while potentially benefiting from falling rates, are negatively impacted by rising inflation, which erodes income and puts pressure on yields. Historically, equities also struggled during stagflation, with returns often turning negative as companies faced falling revenues and rising costs. 

The complex interplay of these factors makes asset allocation difficult, underscoring the need for careful planning and diversification in portfolios to mitigate the adverse effects of stagflation.

Which asset classes perform better during stagflation?

Some assets become more attractive during stagflation, including real assets, inflation-linked products, and stocks of companies with pricing power.

Real assets are often favoured as they possess intrinsic value and can offer a hedge against inflation. This category includes gold and other precious metals, which have historically been seen as safe havens during times of economic uncertainty and high inflation, retaining their value when currencies may be depreciating. 

Commodities, such as crude oil, industrial metals, and agricultural products, also gain appeal. This is partly because supply-side shocks, which can contribute to stagflation, often directly cause an increase in commodity prices. Real estate, particularly where rents can be adjusted to reflect inflation, can offer a degree of inflation protection. However, a rising interest rate environment can exert downward pressure on property values.

Another key asset class designed to protect against inflation is inflation-linked bonds. In the US, Treasury Inflation-Protected Securities (TIPS) are prime examples.

Within the equity market, stocks of companies with pricing power tend to outperform during stagflation. These are firms with strong brands, unique technologies, or essential services that allow them to effectively pass on their increased operating costs to consumers without significant loss of demand. Such companies are often found in defensive sectors like consumer staples, utilities, and healthcare, as well as some resilient technology sectors. 

High-dividend stocks from companies with stable cash flows and consistent dividend-paying capabilities, including utilities, consumer staples, or REITs, generally show resilience during economic downturns.

Investing in a single asset carries concentration risk, while frequently adjusting holdings can increase market timing risk. Endowus advocates for a disciplined, long-term strategy based on sound investment principles. In periods of stagflation, diversification becomes even more crucial. 

Attempting to time the market is futile. Even during challenging times, maintaining a globally diversified portfolio across various asset classes ensures investors benefit from the market's long-term upward trend, which is an inherent reflection of global economic expansion.

Get in touch with our advisors on how to stagflation-proof your portfolio

Economic phenomena can pose significant challenges to traditional investment strategies. By recognising the signs of stagflation and adapting your approach accordingly, you can better position yourself to weather economic uncertainties.

It is essential to stay informed and seek expert financial advice to navigate these complex economic conditions. Our MAS-licensed advisors can guide you and your investments through potential economic uncertainties.