- Stagflation, the combination of slow growth and high inflation, could return in the U.S. Depending on the outcome of the Trump Administration’s policy decisions. Tariffs, such as those imposed this week on Canada, Mexico, and China, have the potential to push up prices and hit trade.
An economic boogeyman from the 1970’s could be coming back to haunt U.S. Consumers, and experts say if it takes hold, it may be relentlessly persistent.
While there hasn’t been a major period of stagflation in the U.S. For 40 years, experts say there is now a possibility that the perfect storm of higher-than-desired inflation and slow economic growth could plague the economy once again.
“Those two things taken together is kind of the worst of all worlds,” Van Hesser, chief strategist of rating agency KBRA, told Coins2Day.
Brought in part by the surge in crude oil prices due to an OPEC embargo on the U.S., stagflation wreaked havoc on the economy for years starting in 1973. During this period, the price of living skyrocketed while the unemployment rate increased to 10.8% at the end of 1982, compared to 4% today. That period of stagflation only ended after former Fed Chair Paul Volcker raised interest rates to record high levels and a recession struck the U.S. Economy in the early ’80s.
Hesser said that while the risk of stagflation hitting again is low, the shock of recent policy decisions by the Trump administration have opened up the possibility of it happening again.
Inflation has been sticky in the U.S. Since it started in 2021, and President Trump’s policies have the potential to increase it. The president’s tariffs this week issued against the country’s three biggest trading partners—Canada, Mexico, and China—could force companies to raise prices on certain imported goods. At the same time, reduced immigration from Trump’s border policies may cut down the available labor force and push up wages. Finally, a potential future tax cut could put more money into some Americans’ pockets.
Meanwhile, Trump’s tariffs could slow economic growth by serving as a barrier to free trade. Mass layoffs in the federal government orchestrated by Elon Musk’s DOGE and reduced federal contracts could also contribute.
The U.S. Economy is strong, therefore stagflation isn’t a near term risk, said Carnegie Mellon finance professor and former SEC chief economist Chester Spatt. Still, depending on how tariffs are implemented (Trump just granted a one-month exemption to U.S. Automakers) and how they affect the greater economy, stagflation could become a possibility, he added.
Spatt said one of the key issues in recent years has been persistent inflation, and the final stretch to reach the Fed’s 2% target is usually the hardest. While the year-over-year inflation rate fell below 2.9% for the first time in December, it increased to 3% in January, according to the Consumer Price Index.
While the odds are still low, the potential onset of stagflation could become a vicious cycle that is difficult to break, added Hesser.
The belief that prices will rise could cause businesses to try to get ahead of rising costs by raising prices. At the same time, workers who begin seeing everyday products get more expensive may push their employers for a raise. Once it starts, the cycle is difficult to end, he added.
“It becomes embedded in the psychology of how employees think, how consumers think, how businesses think,” Hesser said. “Once that becomes embedded, it becomes very difficult to unwind.”
