Oil prices are expected to remain elevated amid the ongoing Middle East conflict, heightening the risk of stagflation.

Stagflation is an economic condition marked by the combination of slowing growth, rising inflation and high unemployment occurring simultaneously. According to Joseph Stiglitz, Nobel Prize–winning economist, the ongoing conflict in the Middle East has heightened the risk of the United States slipping into stagflation, as per AFP and as quoted on Yahoo Finance.

Stiglitz noted that the U.S. economy was already on the brink of stagflation, characterized by a challenging mix of elevated inflation and sluggish growth. He also noted that President Trump’s tariff policies could further add to inflationary pressures.

Rising Oil Prices Set to Put Pressure on Portfolios

Oil prices have surged since the onset of the Middle East conflict. The surge in oil prices has revived inflation concerns, as elevated energy costs risk fueling broader price pressures and complicating central bank policy, adding to investor unease. U.S. crude benchmark West Texas Intermediate (WTI) has risen approximately 26.6% over the past month, extending its year-to-date gain to about 37.1%, according to OilPrice.com.

The Middle East conflict has persisted longer than anticipated, with ongoing supply disruptions, including the closure of the Strait of Hormuz and continued damage to regional oil infrastructure, driving a surge in oil prices.

Oil prices are expected to remain elevated even after the Middle East conflict eases, as damage to key energy infrastructure across the region may take time to repair, potentially constraining near-term production capacity and keeping supply conditions tight.

According to International Energy Agency Executive Director Fatih Birol, per Bloomberg and as quoted on Yahoo Finance, over 40 energy assets across nine Middle Eastern countries have sustained severe damage, raising the risk of prolonged supply chain disruptions beyond the conflict.

Back to the 1970s With Stagflation Fears?

Per Birol, current disruptions are estimated to match the combined impact of the 1970s oil crisis and the 2022 natural gas shock after Russia invaded Ukraine. This underscores a renewed risk of 1970s-style stagflation.

Per Barron's, stagflation has returned to the spotlight as the U.S.-Israel attack on Iran puts renewed pressure on global oil supplies. With inflation persistently running above the Fed’s target and signs of economic slowdown emerging, the key ingredients for stagflation appear to be in place, needing only a final push, such as a further rise in oil prices.

Per the abovementioned Barron’s article, historical precedent underscores the risks, with the Dow Jones Industrial Average delivering virtually flat returns, rising just 0.05% over the decade. Inflation surged sharply, with the Consumer Price Index climbing 186.4% between 1968 and 1983, an average annual increase of 7.3%, led by energy prices, which rose 9.9% annually.

ETF Strategies to Help Counter Stagflation Pressure

For investors, increasing exposure to defensive funds while maintaining a long-term investment horizon can be a prudent strategy in the current environment. Diversification, paired with a long-term outlook, remains key to navigating the uncertainty.

Staying invested and looking past short-term volatility is the key to riding out such turbulent phases. For investors whose portfolio is skewed toward higher-risk assets or limited diversification, a gradual rebalancing toward a more balanced risk profile may be worth considering.

Rising inflation and economic headwinds are likely to strain household finances, prompting investors to adopt a more cautious, risk-averse stance and reassess discretionary spending.

Below, we have highlighted a few ETF areas that investors may consider expanding their exposure to, as the risk of rising inflation increases.

Dividend ETFs

Dividend-paying securities serve as primary sources of reliable income for investors, particularly during periods of equity market volatility. These stocks offer dual advantage safety, in the form of payouts, and stability in the form of mature companies that are less volatile to large swings in stock prices. Companies offering dividends often act as a hedge against economic uncertainty.

Investors can consider Vanguard Dividend Appreciation ETF (VIG Quick QuoteVIG - Free Report) , Schwab US Dividend Equity ETF (SCHD Quick QuoteSCHD - Free Report) and Vanguard High Dividend Yield Index ETF (VYM Quick QuoteVYM - Free Report) , with dividend yields of 1.66%, 3.43% and 2.39%, respectively.

Consumer Staple ETFs

Increasing exposure to consumer staple funds can bring balance and stability to investors’ portfolios. Investors can put more money in consumer staples funds to safeguard themselves from potential market downturns.

Investors can consider Consumer Staples Select Sector SPDR Fund (XLP Quick QuoteXLP - Free Report) , Vanguard Consumer Staples ETF (VDC Quick QuoteVDC - Free Report) and iShares U.S. Consumer Staples ETF (IYK Quick QuoteIYK - Free Report) .

Utility ETFs

As a low-beta sector, utilities are relatively shielded from market volatility, making them a defensive investment and a safe haven during economic turmoil. Investors often turn to utilities during downturns due to the steady demand for these companies' services.

Investors should gain from funds like Utilities Select Sector SPDR Fund (XLU Quick QuoteXLU - Free Report) and iShares U.S. Utilities ETF (IDU Quick QuoteIDU - Free Report) .

Healthcare ETFs

The healthcare sector is non-cyclical, providing a defensive tilt to the portfolio amid market turmoil. Given its relative resilience in low-growth and uncertain environments, the sector often attracts increased investor interest in such phases.

Investors can look at funds like Health Care Select Sector SPDR Fund (XLV Quick QuoteXLV - Free Report) , Vanguard Health Care ETF (VHT Quick QuoteVHT - Free Report) and iShares U.S. Healthcare ETF (IYH Quick QuoteIYH - Free Report) .