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If you follow financial news, you’re probably hearing about “stagflation” now more than ever. But what is it? A lot of people aren’t sure. In April 2025, internet searches for stagflation hit an all-time high since Google began tracking terms more than 20 years ago.

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WHY IS STAGFLATION BAD FOR THE ECONOMY?

Stagflation refers to a specific combination of nasty economic conditions: stagnant economic growth, high unemployment and high inflation. It’s both relatively rare and particularly painful, not only for everyday Americans, but for economic policymakers – because the usual tools to combat inflation, such as raising interest rates, can further slow economic growth and increase unemployment.

To be clear, we’re not currently experiencing stagflation by any stretch. As of the latest economic reports, inflation is relatively normal, unemployment remains low, and the economy has continued to grow, albeit more slowly.

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WHAT CAUSES STAGFLATION?

The term "stagflation" was coined in the 1970s when many economies experienced this frustrating combination of economic stagnation and inflation.

During this decade, the global economy faced high inflation rates, driven by oil price shocks and other factors, while economic growth remained sluggish. Unemployment rates also increased, creating a challenging environment for policymakers. The traditional economic tools were ineffective in addressing both inflation and slow growth simultaneously, leading to prolonged economic difficulties.

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WHY IS STAGFLATION SUDDENLY A CONCERN?

Some economists and business leaders have been worried about the possibility of recession for the past few years. After a period of high inflation that led to higher interest rates, which slowed economic growth, they feared the Federal Reserve might have started reducing interest rates too slowly. That could have led to economic contraction and job losses.

While many economists believed we had successfully achieved a “soft landing,” successfully bringing down inflation with no recession, the concern now is that high tariffs could simultaneously reignite inflation and cause the economy to contract. In that case, the Fed would face a dilemma, because raising interest rates, the typical response to high inflation, would likely make an economic contraction worse.

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STAGFLATION VS. RECESSION

WHAT IS RECESSION?

Recessions are often defined as two consecutive quarters where the nation's GDP declines. In other words, the economy contracts instead of growing.

While it’s not necessary for a recession, they often involve higher unemployment (because when businesses aren’t growing, they may lay workers off or stop hiring) and slower consumer spending (because people tend to pull back when their finances are more uncertain).

Importantly, inflation typically falls during a recession. Consumers and businesses tend to focus more on pulling back spending, so there’s lower demand, which puts downward pressure on prices.

IS STAGFLATION WORSE THAN A RECESSION?

Yes. You can think of stagflation as a recession plus high inflation – the worst of both worlds. Not only might you have to deal with potential job loss or stagnant wages, you’d simultaneously be juggling higher prices.

As we said above, stagflation is bad for policymakers too, because it’s more difficult to get out once you’re in it. While recessions are painful, the Federal Reserve has a tried-and-true way of handling them: reducing interest rates. This is designed to stimulate consumer and business borrowing, which helps the economy grow.

But with stagflation, reducing rates may not be an option, because it also tends to increase inflation, which in this case is already high. And high inflation can make economic contraction and job losses even worse.

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WHAT YOU CAN DO TO PROTECT YOUR FINANCES

When deciding what actions to take in the face of potential stagflation, it’s important to remember this: You don’t control inflation. You don’t control GDP. And you don’t control any of the policy decisions that could lead to stagflation.

But you do control your own financial plan. (You have one, right? If not, that’s the first step.)

These are all steps you should take regardless of the economic environment, but they become even more important when uncertainty is high.

DIVERSIFY YOUR PORTFOLIO

Diversification is a cornerstone of our investment philosophy, and its goal is to reduce your portfolio risk and seek to optimize your returns. As we pointed out in a recent market insights article, not all asset classes have performed equally well or badly in recent market volatility (and that’s also true over time, not just recently). Having exposure to better-performing investments doesn’t guarantee positive returns, but it does help dampen overall portfolio losses if we enter a bear market.

CHECK YOUR EMERGENCY FUND

The ideal amount you should have in your emergency fund to carry you through a potential job loss depends on a few factors:

• How at-risk do you think your job is? This may depend on what type of job you have, what kind of business your company’s in and what the economic environment is like.
• How reliant is your household on your income? If you’re the only earner, you may need more saved.
• ·How much of your budget is discretionary? If most of your spending is on housing, food and other critical items you can’t cut, you might need to save more than someone whose spending is mainly discretionary.

This is a great time to make sure you have an appropriate amount saved in liquid assets. You may want to increase it if you think your job’s more at risk or if you’re concerned about higher inflation.

HOLD OFF ON SPENDING

The more money you have available, the calmer you’re likely to feel about a potential economic downturn. You might want to wait on big nonessential decisions that would eat into your liquidity, like buying a second home, retiring early or paying off large debts (especially ones with low interest rates).

And don’t let potential inflation force your hand on buying things you didn’t plan to buy right now, like a new car or a big renovation. Stick to your plan.

While major purchase decisions are where you have the best chance of saving money, you can also look more closely at your day-to-day spending. Decide which costs you could cut if you had to (or cut costs proactively if you’re especially concerned). Our monthly expenses worksheet can help.

INCREASE YOUR INCOME

This may or may not be a good time to try finding a new job, depending on your personal circumstances (and what happens in the next few months). But you can also consider upskilling at your current job, pursuing a promotion or starting a side business.

LOOK AT YOUR TAX STRATEGIES

Recessionary environments can trigger permanent or temporary changes in tax regulations, in an effort to stimulate the economy. But tax planning should always be part of your financial plan, and it should happen all year long, not just during tax season or when something changes. If you haven’t met with a tax professional and a financial planner to talk about foundational tax strategies that make sense for you, do that now.

MAKE SURE YOU’RE GETTING GOOD RATES ON YOUR CASH

Remember that emergency fund? At the moment, you can still earn a yield on your cash that’s higher than inflation. But you might not be getting the best rates, depending on where you hold your cash. High-yield savings accounts, CDs and money markets generally offer higher rates than bank accounts. Take advantage of them.

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DON’T NAVIGATE STAGFLATION ALONE – WE'RE HERE TO HELP

No one wants to navigate an environment of stagflation – and of course it may not come to that. We’re not even in a recession, after all. But whatever challenges we face, remember that there are things you can control even if the economy isn’t one of them.

Having the guidance of a professional financial advisor can mean more than ever when times get tough. Connect with us to schedule an intro call so we can help you protect your financial future in this environment and whatever comes next.