It's a word not often heard in America since the 1970s: stagflation. The term describes a triple-whammy of terrible economic conditions — high unemployment, low growth and supercharged inflation. Now some economists are warning that a new era of stagflation could be on the horizon.
President Donald Trump's economic policies risk the "worst of all possible worlds: a kind of stagflation," Nobel-winning economist Joseph Stiglitz said to The Guardian. Trump's "on-off tariff plans" and "apparent contempt for the rule of law" will make businesses less likely to invest. The sudden cancellation of U.S. government programs and contracts will create further uncertainty, he said, and will likely produce "inflation, and a weak economy." Without a course change, "I could certainly see a scenario where we get to stagflation," Stiglitz said.
'High inflation and very slow growth'
The last era of American stagflation occurred "when oil prices spiked during the Arab oil embargo" during the 1970s, CNN said. The era left an imprint on many of today's economic policymakers. "It was 10% unemployment," Federal Reserve Chair Jerome Powell said during a speech in May. "It was high-single-digits inflation and very slow growth." The Fed ultimately defeated stagflation with bitter medicine: It "aggressively" raised interest rates and triggered a painful recession during the early 1980s, CNN said.
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New reports showing inflation rising back to 3% make the current moment feel like a "light version of the 1970s," Edward Harrison said at Bloomberg. It's now clear that inflation is sticky — "price moderation" bottomed out in September — and the Trump administration's "seriously inflationary policies" will only add to the upward price pressure. Today's inflation numbers "may be lower today" than they were 50 years ago, but the trend lines are similar. That presents a big challenge to Powell, who "doesn't want to be remembered as the next Arthur Burns, the Fed Chair during the mid-1970s stagflation," said Harrison.
There is "anxiety among economists" about a new era of "stagflation-lite," said MarketWatch. The Trump administration's tariff announcements "make it harder for business to invest," while the promise of mass deportations could "dry up" the labor pool, forcing businesses to raise wages. The "remaining wild card" is spending — "sharp cuts" to the federal budget would produce "another drag on the economy." As a result, "stagflation-lite is a really useful phrase to describe what could happen," said Capital Economics' Paul Ashworth.
Tariffs could be key
Trump's tariff maneuvering could decide what happens next. He announced 25% tariffs on imports from Mexico and Canada at the beginning of February, only to delay their implementation by 30 days. If they do go into effect, analysts at Wells Fargo expect the United States GDP "growth would slow" even as inflation expectations would tick up, said Sourcing Journal. That could change if there are carve-outs for certain product categories, or if the tariffs are only temporary. But persistent, widespread tariffs could lead to an ugly formula: "Negative growth along with an inflation boost equals stagflation."
