February 2022

Inflation rose 7% in December 2021, capping off a year of increasing inflationary numbers. The last time the US saw such high inflation was in 1982, when the US economy was suffering through the second leg of back-to-back recessions, inflation had soared, and the Federal Reserve had hiked rates to 19%. That was the last time the US experienced an economic condition called stagflation, where the measures used to fight runaway inflation tipped the economy into recession and pushed unemployment above 10%. For investors there was no place to hide as bonds and equities suffered negative returns.

Fortunately, since that time, stagflation has been rare in advanced economies. But memories of steep market losses caused by stagflation cast a long shadow. Hence the recent surge in US inflation has investors concerned that they may experience stagflation for the first time in 40 years. This is because both bonds and equities (public and private), which represent the primary components of many diversified portfolios, could suffer negative returns in a stagflationary environment.

While Meketa believes that it is unlikely that the current inflationary environment will deteriorate into full-blown stagflation, we acknowledge that institutional investors may benefit from a closer look at stagflation, its origins, variables, and potential outcomes.

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