Stagflation can have a devasting impact on economies, combining stagnate (STAG-) or even negative economic growth, with elevated or rising inflation (-FLATION).

Stagflation is the worst of both worlds. A stagnant economy struggles to create jobs and growth, while inflation eats away at your money's buying power. This toxic mix breaks the typical economic rulebook. For investors, stagflation is a paradox: the economy slows, yet prices keep rising, a combination that can quietly undermine a portfolio built for normal conditions.

Learning from history: the 1970s wake-up call

The 1970s showed us just how painful stagflation can be. Back then, inflation hit 14% while unemployment reached 9%,¹ something many economists thought was impossible. The decade started with President Nixon ending the currency gold standard and imposing wage controls. Then came the oil crisis of 1973 when OPEC quadrupled oil prices.

The S&P 500's 17% gain for the decade was erased by runaway inflation,² resulting in significant losses for investors. Meanwhile, gold soared from $35 to $850 per ounce - a 2,300% gain.³ Real estate and commodities also performed well, while traditional bonds got battered.

The lesson? When stagflation hits, it can benefit investors to consider different strategies to mitigate the impact of the irregular market conditions that stagflation can bring about.

Horns up – five portfolio strategies to help mitigate the impact of stagflation

Here are five historically effective strategies to help protect your portfolio:

1. Consider commodities as an inflation shield

   Commodities returned 586% during the 1970s stagflation period⁴ compared to stocks' painful losses. Gold, energy and agricultural products tend to rise with general price levels.

   You can gain exposure through commodity ETFs, or stocks of companies that produce raw materials. Even a modest allocation to gold can provide meaningful protection when traditional investments struggle in an inflationary, or stagflation environment.

   Think of commodities as insurance for your portfolio – they won't always outperform, but when inflation hits, they often shine.

2. Lean into defensive equity sectors

   Not all stocks perform equally in a stagflation environment. Energy, Consumer Staples, Healthcare, and Utilities showed resilience in the 1970s⁵ because people still need food, medicine and power regardless of economic conditions. These defensive sectors act like financial shock absorbers during economic turbulence.

   Companies in the Consumer Stables sector often have pricing power, meaning they can raise prices to maintain profit margins. Consider businesses with strong balance sheets and the ability to pass costs to consumers as one way to mitigate the impact of inflation and a sluggish economy.

3. Consider Treasury Inflation-Protected Securities (TIPS)

   TIPS adjust their principal value based on inflation, which guarantees you maintain purchasing power. TIPS can be volatile in the short term, but their core design is built to protect your investment's value in an inflationary environment,⁶ with shorter-duration TIPS (under 5 years) offering the greatest stability. They won't make you rich, but they'll preserve wealth when inflation erodes other investments.

4. Invest in real estate strategically

   Real estate provided about 4.5% annual real returns during the 1970s stagflation,⁷ outperforming stocks and bonds. Property values and rents typically rise with inflation, especially if you own properties with flexible lease terms.

   Real Estate Investment Trusts (REITs) offer an easy way to invest in and diversify your real estate holdings. For stagflation, focus on REITs holding properties with flexible, adjustable rents are better positioned to keep pace with inflation than those with long-term, fixed leases.

5. Cash is king – avoid long-term bonds but consider short-term alternatives

   Long-term bonds face a two-front attack during stagflation. First, central banks raise interest rates to fight inflation, which pushes down the value of existing bonds. Second, that same inflation erodes the value of the fixed interest payments you receive over the years.

   If you require income to meet your living expenses, consider short-term Treasury bills, short-term bonds, or high-yield savings accounts that can adjust to rising rates. Money market funds also provide liquidity while offering better capital protection than long-term fixed income.

Solving the paradox – we can help

Stagflation can leave investors stuck on the horns of a dilemma, forcing them to rethink the standard portfolio management playbook. Shifting focus toward real assets, defensive businesses with pricing power, and inflation-protected debt can help provide a solution to the dilemma.

You don't need to predict the next crisis. By building resilience into your portfolio today, you prepare your wealth to weather whatever economic storms may come.

Talk to us today about how we can help protect your portfolio while building a customized and risk profile-appropriate investment plan that can help you reach your goals through all market conditions.

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Sources

1. Federal Reserve History. "Great Inflation." Federal Reserve History. https://www.federalreservehistory.org/essays/great-inflation
2. Investopedia. "Why is stagflation bad for the Economy." Investopedia. https://www.investopedia.com/why-is-stagflation-bad-for-the-economy-6892152
3. Gold. " Gold in the 1970s: A Decade That Changed the Gold Market Forever." Gold. https://moneyweek.com/investments/how-to-invest-during-stagflation
4. CME Group. "Commodities as an inflation hedge." CME Group Education. https://www.cmegroup.com/education/articles-and-reports/commodities-and-inflation.html
5. Morningstar. "Defensive Sectors Analysis." Morningstar. https://www.morningstar.com/articles/1050737
6. TreasuryDirect. "Treasury Inflation-Protected Securities (TIPS)." U.S. Department of Treasury. https://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips.htm
7. REIT.com. "Four Reasons REITs Belong in Retirement Portfolios." National Association of Real Estate Investment Trusts. https://www.reit.com/news/articles/four-reasons-reits-belong-in-retirement-portfolios-

This document has been prepared for use by the RBC Wealth Management member companies, RBC Dominion Securities Inc.*, RBC Phillips, Hager & North Investment Counsel Inc., RBC Global Asset Management Inc., Royal Trust Corporation of Canada and The Royal Trust Company (collectively, the “Companies”) and their affiliate, Royal Mutual Funds Inc. (RMFI). *Member – Canada Investor Protection Fund. Each of the Companies, RMFI and Royal Bank of Canada are separate corporate entities which are affiliated. The information provided in this document should only be used in conjunction with a discussion with a qualified professional advisor when planning to implement a strategy.        â/ ™ Trademark(s) of Royal Bank of Canada.  Used under licence.   © Royal Bank of Canada. (2025). All rights reserved.