diff --git a/okhttp/src/main/java/com/squareup/okhttp/internal/http/HttpEngine.java b/okhttp/src/main/java/com/squareup/okhttp/internal/http/HttpEngine.java
index 142def466..df5af0c47 100644
--- a/okhttp/src/main/java/com/squareup/okhttp/internal/http/HttpEngine.java
+++ b/okhttp/src/main/java/com/squareup/okhttp/internal/http/HttpEngine.java
@@ -649,10 +649,17 @@ public class HttpEngine {
       if (cachedResponseHeaders.validate(responseHeaders)) {
         release(false);
         ResponseHeaders combinedHeaders = cachedResponseHeaders.combine(responseHeaders);
-        setResponse(combinedHeaders, cachedResponseBody);
+        this.responseHeaders = combinedHeaders;
+
+        // Update the cache after applying the combined headers but before initializing the content
+        // stream, otherwise the Content-Encoding header (if present) will be stripped from the
+        // combined headers and not end up in the cache file if transparent gzip compression is
+        // turned on.
         OkResponseCache responseCache = client.getOkResponseCache();
         responseCache.trackConditionalCacheHit();
         responseCache.update(cacheResponse, policy.getHttpConnectionToCache());
+
+        initContentStream(cachedResponseBody);
         return;
       } else {
         Util.closeQuietly(cachedResponseBody);
diff --git a/okhttp/src/test/java/com/squareup/okhttp/internal/http/HttpResponseCacheTest.java b/okhttp/src/test/java/com/squareup/okhttp/internal/http/HttpResponseCacheTest.java
index aa3948b19..cbbeb987a 100644
--- a/okhttp/src/test/java/com/squareup/okhttp/internal/http/HttpResponseCacheTest.java
+++ b/okhttp/src/test/java/com/squareup/okhttp/internal/http/HttpResponseCacheTest.java
@@ -946,8 +946,14 @@ public final class HttpResponseCacheTest {
     server.enqueue(
         response.setBody(gzip("ABCABCABC".getBytes("UTF-8"))).addHeader("Content-Encoding: gzip"));
     server.enqueue(new MockResponse().setResponseCode(HttpURLConnection.HTTP_NOT_MODIFIED));
+    server.enqueue(new MockResponse().setResponseCode(HttpURLConnection.HTTP_NOT_MODIFIED));
 
     server.play();
+
+    // At least three request/response pairs are required because after the first request is cached
+    // a different execution path might be taken. Thus modifications to the cache applied during
+    // the second request might not be visible until another request is performed.
+    assertEquals("ABCABCABC", readAscii(openConnection(server.getUrl("/"))));
     assertEquals("ABCABCABC", readAscii(openConnection(server.getUrl("/"))));
     assertEquals("ABCABCABC", readAscii(openConnection(server.getUrl("/"))));
   }