Stagflation — that mix of rising prices and slow growth — hasn't cast a shadow over the U.S. economy in four decades, but experts say the current economic climate presents a potential risk of this challenging scenario. The economy is slowing but inflation isn't. That's not good for anyone. The UK economy is weak and suffers from troublingly persistent core inflation. A Labour government would inherit a challenging backdrop. A year ago, the dominant narrative in markets was that we were heading into a rerun of the “Roaring Twenties,” with the global economy set for a period of rapid growth and prosperity. However, the reality has proven to be more complex, with stagflation becoming a concern for investors.
Inflation, and specifically stagflation, makes investing more challenging. Stagflation is when inflation is high, but growth is low or stagnant. This can be a difficult environment for investors to navigate, as traditional asset classes like equities and bonds become increasingly unattractive. So, what assets do best during stagflation? How can investors protect and grow their wealth in such uncertain economic times?
Analysts recommend several investing strategies for navigating stagflation risk. One approach is a 'barbell' strategy, which involves combining safe, low-risk investments with higher-risk, potentially higher-yielding assets. Another strategy is to focus on 'price setters' – companies that have the ability to set their own prices rather than being influenced by market forces. Additionally, investors should avoid assets that are highly sensitive to interest rates, as these can be negatively impacted during stagflation.