Is stagflation back? What the 1970s tell us about investing in 2026

The 1970s playbook: How to position your portfolio if stagflation takes hold

In 2026, something unusual is happening in Australia’s economy: it’s running hot and cold at exactly the same time.

Inflation is elevated and interest rates are rising. Yet consumer sentiment is slipping, redundancies are climbing and cost of living pressures are biting hard.

Orthodox economics says this combination shouldn’t exist. Inflation is supposed to be a symptom of a booming economy – of too much money chasing too few goods.

When growth slows prices are meant to follow. So, the fact that they aren’t, points to something rarer and considerably harder to fix.

It’s called stagflation and, the last time it took hold in the 1970s, it defined an entire decade. So what can we learn from back then? And what should it mean for the way you invest today?

What is stagflation (and why is it so bad?)

For the past 40 years, most investors have built their portfolios in an environment where the rules were somewhat predictable.

When the economy slowed, demand for many goods and services fell below supply, so the price of things – or inflation – began to fall too. To stimulate the economy, central banks cut interest rates, reducing the cost of borrowing and encouraging people to spend.

On the other hand, when the economy heated up, demand began to outstrip supply, prices rose and central banks began hiking interest rates to stop the economy from overheating.

Stagflation is a set of circumstances that breaks both these rules simultaneously.

Under stagflation, inflation rises while the economy stays soft. That’s because price rises aren’t being driven by excess demand (or “pull” factors) but by constraints (or “push” factors) on supply – things like increased energy costs, disrupted supply lines or structural shifts in the economy.

When the source of inflation is the higher cost of inputs into economic activity, central banks can’t simply pull the interest rate lever and hike inflation away. And that leaves them with a problem that’s both harder to control and more painful to unwind.

With stagflation, growth slows but prices keep rising. Households get squeezed from both sides (i.e. higher prices and less spending money). And policymakers are left trying to solve two problems that were supposed to cancel each other out.

Why stagflation may have returned in 2026

The reason stagflation is back in the conversation in 2026 is not simply that inflation has reappeared: it’s why inflation has reappeared. And the biggest reason for that is the war in Iran, and its impact on oil prices.

On 28 February 2026, as the Iran war began the price of Brent crude oil was US$72 a barrel. By the end of March, after the near-closure of the Strait of Hormuz, it had hit almost US$120, with experts warning prices could rise far higher if flows didn’t normalise.

Given Australia imports most of its liquid fuel – and relies heavily on diesel or petrol power for everything from freight to farmwork and from public transport to manufacturing – this isn’t an abstract global event for us. It’s an input cost that shows up in the price of virtually everything.

When the price of oil rises, the cost of moving goods rises. The cost of producing goods rises. The cost of running businesses rises. And eventually, much of those costs are passed on to households too, leaving them with less money to spend on anything but the essentials. The economy slows and central banks are left with an uncomfortable choice: raise rates to fight inflation and risk making the slowdown worse or hold back and risk letting inflation run wild.

That said, the Iran war isn’t the only factor that led to today’s strange economic environment. The economy was already vulnerable after suffering a bout of inflation in the wake of COVID-19, which hadn’t yet fully receded before the current oil crisis.

The global backdrop was also becoming less helpful. Global trade tensions have been mounting and, more alarmingly, China’s economy has been slowing. That means demand for iron ore – Australia’s most important export – may no longer be the reliable growth engine we’ve become used to.

That creates a second squeeze: higher imported inflation from energy, but weaker external demand from key trading partners.

So the risk in 2026 is not one shock. It’s a stack: rising oil prices, sticky services inflation, higher borrowing costs, weaker consumer confidence. A slowing China… And a central bank with fewer easy choices than it’s had in a generation.

That’s why stagflation feels so disorienting. It’s not just inflation in a bad mood, it’s inflation arriving from the wrong direction, at the wrong time, in an economy that already seems to be losing momentum.

Stagflation in history: A warning from the 1973 oil crisis

The last time the world experienced a sustained period of stagflation began in 1973, when – like today – there was a sudden shock to the global energy system.

Following the Yom Kippur War, oil-producing nations led by OPEC imposed an oil embargo on countries that had supported Israel, including the United States and the Netherlands. The price of oil surged and, in a matter of months, it had roughly quadrupled, with immediate and far-reaching consequences.

Then, as now, energy was a critical input into almost every part of the economy. So, as oil prices rose, inflation did too.

Economic growth – which had been more or less uninterrupted for a quarter of a century – then began to slow. Households were forced to spend more on essentials and had less left over for discretionary consumption. Businesses faced rising costs and declining demand. Unemployment rose. Economies that had been expanding through the post-war boom suddenly stalled.

This created the defining feature of stagflation: high inflation alongside weak growth and, eventually, rising unemployment. It was a combination of factors many economists had thought unlikely, if not impossible.

Because of this, policymakers struggled to respond. Central banks initially tried to support growth by keeping interest rates on hold, only to find that inflation kept rising. When they eventually tightened monetary policy more aggressively, it helped bring inflation under control, but at the cost of deep economic recession.

In March 1975, inflation in Australia peaked at 17.7 per cent, one of the highest levels ever recorded. At the same time, unemployment rose from around 4 per cent to 6 per cent, reversing decades of post-war stability and placing pressure on both households and government finances.

While there was a temporary reprieve, a second oil shock, triggered by the Iranian Revolution in 1979, pushed inflation higher again. It would take years of punishing monetary policy – and ultimately the recession of the early 1990s – to fully restore price stability and bring unemployment back under control.

Can we avoid stagflation in 2026?

And yet, despite the parallels with the 1970s, some commentators aren’t prepared to call stagflation just yet, and there are several important differences worth noting.

• The labour market remains relatively resilient. While there have been signs of rising layoffs in some sectors, at a national level, job losses have been contained. In March 2026, Australia’s unemployment rate was still 4.3% – well below the 10-year average of close to 4.8%.
• Inflation is not historically high. While inflation remains above central bank targets (it recorded 4.6% in March 2026), it’s still well below the levels of the 1970s. Price pressures are elevated, but they haven’t yet become entrenched in the way they did during that period.
• We may have learned from the past. Central banks are far more attuned to inflation risks than they were half a century ago. Policymakers today are more likely to act decisively to prevent inflation expectations from taking on a life of their own, even if that comes at the cost of slower growth in the short term.
• Australia’s policy backdrop is different. In the 1970s, the oil shock didn’t act alone, but was amplified by domestic settings. In Australia, rapid increases in government spending, combined with wage increases in what was a highly centralised wage system, pushed costs higher across the economy. Today, wage growth is rising, but it remains far more contained.
• This may be a temporary state of affairs. Energy markets can stabilise, supply chains can adjust and global demand can shift. And, Australia’s energy mix is more diversified than it was in 1973, even if we’re still largely dependent on liquid fuel.

Taken together, these factors suggest that while the risk of stagflation has increased, it’s not yet a foregone conclusion.

How to prepare your investment portfolio for stagflation

The stagflation of 1973-74 was a brutal environment for conventional portfolios and the lessons it offers investors in 2026 are worth taking seriously.

In a typical economic cycle, different asset classes tend to balance each other out. When growth slows, central banks cut interest rates. This supports bond prices and helps offset weaker share prices. When the economy strengthens, equities perform well, even as interest rates rise.

In stagflation, the usual buffer between equities and bonds breaks down. When inflation is high and growth is weak, both equities and bonds can come under pressure at the same time.

Between January 1973 and December 1974 the NY Stock Exchange’s Dow Jones Industrial Average lost 45% of its value, as rising costs compressed company margins and higher interest rates weighed on valuations. The ASX also fell 23.3% in 1973 and another 26.9% in 1974.

At the same time, bonds failed to provide their usual protection, as inflation eroded real returns. For instance, although a long-term U.S. Treasury Bond issued in January 1973 yielded around 6.8%, inflation rose from 6.3% in 1973 to 11.2% in 1974, meaning bond investors received negative real returns.

For investors, the lesson from the 1970s isn’t simply to avoid equities and hide in cash. It’s both more nuanced and more instructive.

Some assets did hold up. Companies with genuine pricing power (i.e. those able to pass rising input costs on to customers without losing demand) maintained margins better than others. Real assets, including commodities, infrastructure and certain property types, offered a degree of inflation protection because their value or income streams moved with prices rather than against them.

But the most important lesson for income-focused investors is what happened to fixed income: not just during the stagflationary period, but through it and beyond.

As inflation rose and central banks responded with higher rates, existing bond prices fell and real returns turned negative. Many investors concluded that fixed income was broken and rotated out entirely, but that turned out to be the wrong call.

Yields soon rose to reflect the new inflation reality and new bonds were issued at substantially higher rates, offering income that hadn’t been available for decades. Investors who maintained exposure to quality fixed income through the volatile phase, rather than abandoning it, were positioned to lock in those elevated yields.

And, when central banks eventually started bringing inflation under control, falling rates drove bond prices sharply higher. Those who had stayed the course participated in one of the longest and most rewarding bond bull markets in financial history.

The parallel for 2026 is direct. With Australian yields now at levels not seen since before the global financial crisis, fixed income is once again offering meaningful income that you can count on regardless of what the economy does.

In this environment, what matters is how you access that income. Duration (how long a bond or fixed income asset runs before it matures) becomes critical, because longer-dated bonds carry more interest rate risk if rates continue to rise. The strength of the borrower matters, because a softening economy will put pressure on weaker credit. And the reliability of income matters, because in a world where capital growth is harder to come by, the income payments – or coupon – are doing more of the heavy lifting.

Active fixed income management (i.e. choosing bonds selectively across different maturities, borrowers and sectors, rather than simply buying the market) is precisely the kind of approach that was vindicated in the 1970s – because it allowed investors to stay engaged with the asset class through the difficult phase, capture the income available at elevated yields, and benefit from the eventual recovery.

The investors who fared worst were those who overcorrected, selling quality credit at the point of maximum uncertainty and sitting in cash while yields peaked and then began their long decline.

But stagflation isn’t permanent…

It’s also worth remembering that stagflation, however disorienting, doesn’t last forever.

After two years of heavy losses, the All Ordinaries rose 62.9% in 1975. Supply constraints eventually eased, policy settings changed, and markets adjusted.

The investors who captured those returns weren’t the ones who predicted exactly how events would unfold. They were the ones who stayed positioned to benefit when conditions turned, holding quality income-generating assets through the difficult phase rather than waiting for certainty that never quite arrived.

In 2026, that lesson is as relevant as it has been at any point in the past 50 years.