Stagflation: How to Protect Your Savings When Inflation and Recession Strike at the Same Time

The Analysis: The Worst of Both Worlds

In economics, you rarely get to choose your battles. But there is one scenario that no investor wants to face and that no central bank truly knows how to handle: stagflation. The word is a portmanteau: stagnation + inflation. An economy slowing down (rising unemployment, anaemic growth) while prices keep climbing.

Why is it so problematic? Because the two standard tools of central banks — raising rates to curb inflation, cutting them to stimulate growth — become contradictory. If you raise rates, you hurt an economy already in trouble. If you cut them, you let inflation run wild. It is a trap with no easy exit.

For investors, it is the symmetrical nightmare: equities suffer because companies see their margins squeezed and demand falling. Bonds suffer too because inflation erodes their real yield. The classic 60/40 portfolio, which cushions almost every other economic shock, offers little protection against stagflation.

The Anecdote: Nixon, Gas Rationing, and Endless Queues

November 1973. Across American streets, kilometre-long queues form at petrol stations. "NO GAS" signs multiply. President Nixon has just decreed fuel rationing: odd-number plates fill up on Tuesdays, even-number plates on Thursdays.

It all started with the Yom Kippur War in October 1973. OPEC, dominated by Arab nations, declared an oil embargo against Israel's allies — including the United States. The barrel price jumped from $3 to $12 in a matter of weeks.

But there was deeper context. Since 1971, Nixon had severed the link between the dollar and gold (the end of Bretton Woods). The money-printing presses had been running. The Federal Reserve, led by Arthur Burns — a personal friend of Nixon's — had kept rates too low for too long, fearful of dragging down the economy in an election year. Result: when the oil shock hit, pre-existing inflation exploded — and the economy contracted anyway.

That double failure — monetary and geopolitical simultaneously — is what produced the stagflation of the 1970s.

The Historical Fact: Volcker's Shock Therapy

The remedy did not come immediately. It took until 1979 and the appointment of Paul Volcker as Fed Chair by Jimmy Carter. Volcker did something brutal and courageous: he raised the federal funds rate to 20% in 1981.

The medicine was bitter. A severe recession followed. Unemployment hit 10.8% in 1982. Farmers protested outside Congress; car manufacturers sent pieces of timber to the Fed (symbolising the homes nobody was building anymore, for lack of affordable credit).

But it worked. Inflation fell from 14% in 1980 to 3% in 1983. And over the following decade, the United States experienced one of the longest non-inflationary growth phases in their history — the so-called "Great Moderation."

Volcker's legacy: it has been proved that stagflation can be broken, but the cost is very high. Above all, the non-negotiable condition is central bank credibility. Without it, nothing works.

The Concept: Which Assets Resist Stagflation?

Stagflation forces you to rethink your allocation. Here is what history teaches — without guaranteeing a replay, but with solid logic behind each asset class.

Gold. It is the asset that performed best in the 1970s (×20 over the decade). Gold appreciates when inflation is high AND when confidence in paper money erodes. In a stagflationary environment, both conditions are often simultaneously met.

Commodities. Oil, metals, agriculture — in an imported stagflation (supply shock), commodities are often the origin of inflation. Holding them means being "on the right side" of rising costs.

TIPS (inflation-indexed bonds). Their coupons adjust with inflation — so their real yield is protected. Less spectacular than gold, but far more stable.

Value equities in defensive sectors. Energy, healthcare, consumer staples. These sectors can pass inflation on to customers more easily than others (people still need heat, healthcare, food). Companies with pricing power — those able to raise prices without losing customers — tend to hold up better.

What suffers more. Long-duration bonds (whose real yield collapses against inflation), growth equities (valued on future cash flows discounted at rising rates), and cash in the bank (whose real value melts away).

What Axone Takes Away

Stagflation is not a base-case scenario, but it is not fiction either. The 2020s reminded us that inflation can return brutally after decades of dormancy. And in 2026, with persistent geopolitical tensions around energy and massive sovereign debts, the environment remains fertile ground for surprises.

The Axone Capital lesson: build a portfolio that holds in every regime. This does not mean selling everything to buy gold. It means ensuring your allocation includes real assets (gold, commodities, real estate) alongside your equities and bonds — not to maximise returns in normal times, but to absorb the scenario nobody expected.

Understanding the macro regime we are in — the "Macro" pillar of our method — is precisely this exercise. Understand the system, not just the chart.