Key Takeaways

• Real U.S. GDP decelerated from +4.4% in Q3 2025 to +0.5% in Q4 2025, before rebounding to +2.1% in Q1 2026. Meanwhile, core PCE inflation rose +3.4% year-over-year in May 2026, well above the Fed's 2% target.
• Consumer sentiment has declined -18.5% over the past year, with the University of Michigan index at 49.5 in June 2026. Year-ahead inflation is expected to remain high at 4.6%.
• Traditional 60/40 portfolios have historically struggled when growth slows, and inflation stays high simultaneously. In stagflationary conditions, real assets like gold, commodities, and TIPS have served as potential diversifiers for investors seeking to manage this risk.

Opening

Once considered a relic of the 1970s, the pressure of stagflation is again weighing on U.S. consumers and investors. With GDP growth slowing sharply, core inflation running well above the Federal Reserve's 2% target, and consumer confidence near historic lows, the question circulating in the market right now is a simple one: is stagflation now a base-case reality, and how should I hedge my portfolio? In this piece, we break down what the data is showing, why the problem has been so difficult for policymakers to fix, and what it could imply for how investors diversify.

How Is the Data Signaling Stagflation?

The current macro landscape captures stagflation's causality at a smaller scale: growth is cooling while inflation stays sticky above the Fed's 2% target. Three forces help explain how those two conditions, slow growth and persistent inflation, come to coexist:

1. Supply-side shocks: Tariffs, energy spikes, and other global disruptions raise the cost of inputs and imported goods across the economy. Those higher costs drive prices up even as activity slows, creating the simultaneous inflation and stagnation that define stagflationary pressure.
2. A policy trap: The Fed's policy tool, interest-rate hikes, works against inflation driven by a fast-growing economy. When price pressure comes instead from supply constraints and rising costs, higher rates risk deepening the slowdown without fully taming inflation. The 1970s showed the other side: a "stop-go" Fed that eased too soon let inflation get stuck at high levels. Today the bind shows up as a Fed stuck on hold, unable to cut or hike cleanly.
3. Unanchored inflation expectations: Once households and businesses anticipate high inflation, it gets built into wages and prices, making it self-reinforcing even as the economy weakens. Elevated readings like the 4.6% year-ahead inflation expectation are possible indicators that stagflationary pressure is starting to build.

How Do Tariffs Drive Inflation?

Tariffs raise the cost of imported goods and intermediate inputs, and those higher costs pass through the supply chain into the prices consumers ultimately pay. Because this pressure stems from rising costs rather than a fast-growing economy, the Fed's primary lever of raising interest rates is a blunt instrument against it. Higher rates can further slow an economy that is already decelerating without directly relieving the tariff- and supply-driven costs pushing prices higher. This is why today's scenario is so difficult to resolve with monetary policy alone.

• After expanding +4.4% in Q3 2025, real GDP slowed sharply to just +0.5% in Q4 2025 before a partial rebound to +2.1% in Q1 2026; a pronounced deceleration when measured against the prior pace.¹

U.S. Real GDP Growth Has Slowed Sharply from Its 2025 Peak

• Core personal consumption expenditures (PCE), the Fed's preferred inflation gauge which excludes food and energy, rose +3.4% year-over-year in May 2026, with headline PCE at +4.1%.² The Fed targets 2% PCE inflation over the longer run,³ so both readings sit well above the line.

Core PCE Remains Well Above the Fed's 2% Target

How the Fed Is Combatting Inflation

Caught between a slowing economy and above-target inflation, the Fed has voted to stay on hold, keeping its policy rate at 3.50–3.75% since December 2025. The decision reflects a difficult balancing act: cutting rates risks re-accelerating inflation, while hiking risks deepening the slowdown. With both pressures persisting, there is no clear path. The strain is increasingly visible in how households feel. Consumer sentiment has fallen by 18.5% over the past year, with the University of Michigan index at 49.5 in June 2026 (a level historically linked to severe economic stress). Year-ahead inflation expectations remain elevated at 4.6%.⁴ Expectations that stay this high risk becoming self-fulfilling, which is another reason why the Fed is reluctant to declare the fight over.

Consumer Confidence Has Fallen to Levels Tied to Severe Economic Stress

How Does Stagflation Impact the Traditional 60/40 Portfolio?

The 60/40 portfolio model rests on a powerful assumption: when stocks fall, high-quality bonds rise, cushioning the blow. Stagflation challenges that assumption.

Impact on Bonds

Fixed income is designed to provide stability and balance to a portfolio. But bond payouts are fixed, so when inflation runs hot, the real value of those payments erodes and prices fall. More damaging for diversification, stocks and bonds tend to move together in high-inflation regimes rather than offsetting one another. The very negative correlation that makes 60/40 work in normal times can flip positive during inflation, leaving investors exposed to drawdowns in both sleeves when they expect protection.

Impact on Equities

In stagflation, businesses must pay more to operate but sell less, squeezing profitable revenues from both directions. High rates pile on, and the hardest hit is expensive growth stocks. The 1970s offered us a vivid illustration: the broad U.S. market delivered close to zero real return across the decade, the era's premier growth stocks fell the furthest, and companies with genuine pricing power held up far better than the index.

What Stagflation Means for Investors

The takeaway is not to predict a single outcome, but to prepare for several. The end goal is a portfolio that remains resilient not just in favorable scenarios, but across the full range stagflation can produce, from a fragile soft landing to a more entrenched stretch of slow growth and sticky prices. That resilience comes from owning diversified assets whose return drivers are differentiated from mainstream stocks and bonds.

How to Position Your Portfolio for Stagflation

A diversified allocation to real assets such as gold, commodities, TIPS, and infrastructure is a battle-tested strategy that can hedge the simultaneous pressure stagflationary conditions place on equities and bonds.^5,6 Each plays a distinct role: gold as a monetary hedge and store of value, commodities as direct exposure to the input costs driving inflation, TIPS as explicit inflation-linked bonds, and infrastructure as real, cash-generative assets with inherent pricing power.

VanEck has helped investors access these exposures for decades. We have offered access to gold since 1956, when we launched INIVX, the first U.S. open-ended gold-equity mutual fund. In 2006, we launched GDX, the world's first gold miners ETF.

Today that product suite has expanded to span the real-asset spectrum: gold and gold-mining equities (GDX) alongside deliverable physical gold (OUNZ); broad commodities (PIT); natural-resource equities (HAP); and a diversified multi-real-asset allocation (RAAX). Together, these products let investors assemble the kind of multi-scenario, real-asset diversification to address stagflation pressure.

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