A simultaneous combination of high inflation, high unemployment, and stagnant economic growth — a rare and particularly challenging macro environment that defeats conventional policy responses.
Deeper Explanation
Stagflation is the policymaker's nightmare: the standard anti-inflation tool (raising rates) worsens unemployment and growth; the standard anti-recession tool (cutting rates) worsens inflation. The 1970s stagflation — driven by oil supply shocks combined with pre-existing fiscal stimulus — was the defining episode. The portfolio response: real assets (commodities, inflation-linked bonds, real estate) perform best as inflation hedges; equities struggle because high real rates compress multiples while supply-shock-driven inflation squeezes corporate margins without the demand growth that normally accompanies inflation. Marks notes that investors who experienced only the post-1980s environment of disinflation were profoundly unprepared for the 2022 inflation shock.
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