A haunting memory of the 1970— stagflation — has been resurfacing in financial circles for the better part of a year. While people have periodically worried about it at various times over the last 50 years at times of economic uncertainty, concern is ratcheting up. The reasons include President Donald Trump’s trade policies, the potential for higher deficits from extended tax cuts, and inflation that has started to climb again.
"Stagflation has definitely re-emerged as a possibility because we have these policies that could hurt consumer demand even while persistent inflation limits the Federal Reserve's ability to maneuver," Jack McIntyre, portfolio manager for Brandywine Global's fixed income strategies, told Reuters. "It's not a zero-possibility scenario anymore, by a long shot."
"What continues to concern us more than the risk of inflation is stagflation," Tim Urbanowicz, chief investment strategist at Innovator Capital Management, also said to Reuters. "There is that sticky base of inflation to contend with but on top of that, tariffs have the potential to slow down the economy by becoming a tax on consumers and weighing on profits and economic growth."
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Stagflation received its moniker in the 1970s, sparking President Gerald Ford to don a WIP pin, for Whip Inflation Now, to get the public to save more and increase prudence in spending. Technically, stagflation is a combination of rising inflation, high unemployment, and slow economic growth.
JPMorgan Chase's Marko Kolanovic raised similar concerns in February 2024. A halt in inflation's downward trend or price pressures broadly resurfacing "wouldn't be a surprise" given outsized gains in equities, tight labor markets, and high immigration and government spending, he said, according to Bloomberg.
Not all the factors are in place. Inflation has begun to climb again and hiring is slowing, though unemployment is still at historically low levels. Unlike recessions, there is no organization like the National Bureau of Economic Research that officially calls the condition’s existence.
In March 2024, strategists from the Bank of America wrote that the macroeconomic picture is "flipping from goldilocks to stagflation," which they defined as growth below 2% and inflation of between 3% and 4%. Inflation is higher in developed and emerging markets, while the US labor market is "finally cracking," wrote Michael Hartnett.
"Yes, I think there's a chance that can happen again," Dimon said during an April appearance Tuesday at the Economic Club of New York, as Yahoo Finance reported at the time. "I worry that it looks more like the '70s than we've seen before."
When June 2024 came around, CoStar Group said the U.S., and specifically CRE, was having a problem with stagflation. "The current stark reduction in property income signals stagnation inside commercial real estate, with sluggish income growth averaging 3.6% across all sectors, barely outpacing the headline inflation rate of 3.4% in April 2024," it wrote.
Many conditions have improved in the intervening months. If true stagflation involves elevated unemployment rates, things would have to decay more first. Reuters noted that core inflation — excluding food and energy — was 3.3% in January. That is still far below the average 7% in the 1970s and doesn’t explicitly acknowledge the oil crisis that contributed to the inflation rate.
Stagflation is far from certain. However, as Mark Zandi, chief economist at Moody's Analytics, told Reuters, markets may have underestimated the risks. “Tariffs and deportations are a recipe for inflation and hurt growth; both are negative supply shocks,” the wire service reported. And that doesn’t include mass federal government layoffs.
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