What ‘stagflation’ could mean for your money

New economic risks have some experts warning about stagflation — a combination of low economic growth and high inflation.

Persistent inflation above the Federal Reserve’s target and the job market slowdown had already prompted worries. Then surging oil prices due to the Iran war have drawn comparisons to the oil supply shocks that led to shortages and long gas lines Americans saw during stagflation in the 1970s.

Yet some economists say full-blown stagflation, sometimes dubbed a worst-case scenario for the U.S. economy, may not manifest as strongly as it did then, if at all. 

“If there’s a recession and inflation goes up, then there’s a potential for a short period of stagflation — which means low, below potential growth rate and higher inflation — but not something close to what happened in the ’70s and early ’80s,” said Eugenio Aleman, chief economist at financial firm Raymond James.

Raymond James’ forecast calls for only a 35% to 40% chance of a U.S. recession, he said.

The term stagflation will likely continue to come up, Aleman wrote in a recent economic analysis, amid high oil prices and weak employment data.

“People have been talking about stagflation for three, four years, and we have always argued that there is no stagflation,” Aleman told CNBC.com.

The risk of stagflation is “very low,” Aleman said.

Whether stagflation materializes will depend on how the situation develops. The U.S. economy is experiencing a shock following the Iran conflict, leading to rising inflation and constricted output now, according to Gregory Daco, chief economist at strategy consulting firm EY-Parthenon and president of the National Association for Business Economics.

That shock will likely lead to higher inflation, Daco said. The question is the duration, he said.

“If there is a severe, prolonged shock, then yes, certainly there is a risk of entering a stagflationary environment,” Daco said.

The conflict in Iran erased any improvement in consumer sentiment since February, according to early March data from the University of Michigan’s Survey of Consumers, which gauges how households feel about their own financial health and that of the economy.

“U.S. consumers are facing some real headwinds here, even though it’s difficult to know the duration and impact of the war,” said Mark Hamrick, senior economic analyst at Bankrate.

There is a likelihood that inflation will be higher in the intermediate term, he said.

“In terms of sort of trying to make one’s finances bulletproof against higher prices, having adequate liquidity or emergency savings is key,” Hamrick said.

Less than half — 47% — of Americans have enough money saved to cover an unexpected $1,000 expense, Bankrate found in a survey fielded in December. Moreover, 29% of the surveyed individuals said they have more credit card debt than emergency savings.

Well-qualified borrowers face annual credit card interest rates of around 20%, Hamrick said. For others, carrying a balance may be even more expensive.

“Credit is not a long-term solution for lack of liquidity,” Hamrick said. “It’s a short-term tool that has a high expense.”

Several positive factors may help ease consumers’ budgets now, according to Hamrick. Average tax refunds are forecast to increase this filing season, following changes enacted in President Donald Trump’s new “big, beautiful” law. Average hourly earnings also came in at above the pace of inflation in the latest employment report, he said.

Even without clear signs of stagflation, the market has been volatile as investors digest related news such as the jobs numbers and higher oil prices.

Certified financial planner Tom Geoghegan, founder of Beacon Hill Private Wealth in Summit, New Jersey, said he is working with clients to make sure their portfolio, cash reserves and spending plans can weather unexpected market or economic changes.

For cash reserves, such as for individuals who are in or near retirement or for financial goals within a couple of years, an FDIC-protected high-yield savings account can provide ready access to that money, Geoghegan said.

“We don’t want to be in a situation where we’re selling when the portfolio is down,” he said.

For portfolio investments, Geoghegan said, he has been emphasizing diversification in the event of stagflation or other events that may influence the markets.

Rather than focusing primarily on large-cap companies, Geoghegan said, he is encouraging clients to have globally diversified portfolios.

Rounding out your portfolio with other investments such as government bonds or certificates of deposit may help provide stability, according to Geoghegan. Treasury inflation-protected securities, or TIPS, can also offer inflation protection, he said — the principal of these bonds rises as inflation increases.

“The goal isn’t to position a portfolio for one economic outcome, but to avoid being overly dependent on any single scenario,” Geoghegan said.