When you merge an economic standstill with inflation, you get stagflation. The term originated in the 1970s -- when unemployment rose from 4 percent to about 9 percent, and inflation grew from 1 percent to around 11 percent -- and was used again in 2011 when unemployment was about 16 percent and inflation was about 4 percent. In a stagnant economy, the nation’s economic output grows slowly or shrinks. In turn, unemployment rises and consumer purchasing power decreases, while economic growth slows. But even in this environment, wise investments can be found, such as real estate and commodities.
Because the cost of a real estate loan is low and the value of a mortgage falls during stagflation, real estate performs well, Yoram Lusting writes in “Multi-Asset Investing: A Practical Guide to Modern Portfolio Management.” One risk is the possibility that the central bank will increase interest rates, which negatively affects the investor’s returns. Another risk factor is the recession leading to unemployment, which holds down demand. Also, as the discount factor increases, the value of the property falls, which might lead to a seller’s market.
Non-cyclical stocks are defensive stocks whose increase in value isn’t dependent on the economic cycle. Consequently, they offer a dividend yield that might be higher than what an investor can earn on other investments during periods of stagflation, writes Erwin Rempola in "Advanced Moneymaking Techniques: Five Stock Market Methods for Small, Individual Investors.” Non-cyclical stocks include food, clothing, utilities and shelter sectors.
Oil, coal and gas, as well as gold, silver and other precious metals are a good investment during periods of stagflation, says Yoram Lusting. In fact, according to the Market Watch article “Get Ready for Stagflation,” during the period of stagflation of 1966 to 1981, gold produced a 15.4 percent annual return. Jeffrey D. Sachs, director of the Earth Institute at Columbia University suggests that fertilizer and other investments related to food production perform well during stagflation because these investments are influenced by global demand.
When the central bank increases the interest rate, money market investment earnings increase, writes Yoram Lusting. Due to the downward pressure placed on corporate cash flow during an inflationary period, money market investments outperform stocks. Money market investments also outperform bonds because as interest rates rise, the bond value falls. As long as the earnings on cash are greater than the inflation rate, cash will remain a good investment.