Is Stagflation on the Horizon?

Stagflation is a term seldom used since the 1970s, but some are beginning to raise concerns that this economic condition may rear its head in the not-too-distant future. A stagflationary environment is one in which economic growth is sluggish while inflation and unemployment are also stubbornly high. That condition, should it arise, could have marked implications for both the broader domestic economy and the capital markets.

But how does stagflation differ from traditional inflationary pressures, and why should we be concerned?

Inflation versus Stagflation

Inflationary periods are characterized by increasing prices for a variety of goods and services. Inflation can occur for several reasons, including product and labor shortages and elevated levels of demand. It can also be spurred by policy decisions on things such as tariffs and interest rates. Meanwhile, stagflation is a period in which not only are prices for goods and services trending upward, but also where economic growth is simultaneously stagnant or falling. 

Stagflation: Then and Now

In the 1970s, an oil embargo dramatically increased the cost of gasoline in the United States, which had an adverse impact on the overall cost of living, growth, and the rate of employment. It was the first time many Americans had heard the term stagflation.¹

In today’s domestic economy, the factors outlined below are creating conditions that could bring stagflation closer to the forefront than they have been in decades:

• Ongoing inflation concerns: Even though inflation rates in the U.S. have declined from their peak in 2022, core inflation (which excludes food and energy) remains elevated above the Federal Reserve’s (Fed) 2% long-term target. If high inflation should persistent and economic growth falters, particularly as announced tariffs work their way through the economy, it may lead to stagflation.
• International relations are fraying: Relationships with a number of countries – including Canada, China, Japan, Mexico, Russia and many others – have shifted in a more volatile direction. The promise of tariffs on everything from dairy to crude oil have the potential to raise the overall cost of living in the U.S. Other lingering tensions (including, for example, volatility in the Middle East) could lead to rising energy prices or disruptions in oil and gas supplies, which could in turn increase prices even further.
• Supply chain disruptions: Geopolitical events, including the Russia-Ukraine conflict or natural disasters (such as hurricanes), can lead to shortages of key goods, driving up prices, hampering productivity, and slowing economic growth. A significant enough disruption could exacerbate a stagflation scenario.
• Uncertainty: The challenges above are compounded by a level of uncertainty surrounding substantial U.S. policy changes related to trade, immigration, fiscal policy, and regulation.  In particular, tariffs on goods coming into the country, retaliatory tariffs from trading partners, and the resulting potential pass-through costs to consumers and businesses could have both an inflationary impact and a cooling effect on growth and spending as business and the consumer pull back.²

What makes stagflation such a concern?

One of the biggest challenges with regard to stagflation is how difficult it can be to resolve or mitigate. A challenge for policy makers is that central banks like the Fed typically adjust interest rates to combat inflation, but raising rates can lead to higher unemployment and reduced economic growth and thus drive stagflationary pressures even more. Conversely, cutting rates to address high unemployment may buoy asset prices, but worsen inflation.

What could occur within the economy should stagflation take hold?

• Decreased consumer confidence: During periods of stagflation consumers may rightly feel more uncertain about their financial futures. As a result, they may reduce spending, leading to further contraction in economic activity. Declining consumer confidence would also put a dent in corporate earnings and adversely impact the equity markets.
• Decreased commercial confidence: High inflation and low economic growth make it more difficult for businesses to plan. An unpredictable economic environment may deter investment, slowing innovation and long-term economic growth, while also reducing the profitability of many enterprises.
• Increased unemployment: In periods of uncertainty or economic slow-down, businesses may cut back on production or lay off workers. As those workers spend less, corporate earnings would likely be under pressure and government tax receipts could languish.
• Increasing cost of living: Higher inflation means that prices for everyday goods and services may rise rapidly, which can hurt consumers' purchasing power and thus adversely impact the domestic economy.

Bottom Line

Stagflation isn’t our base case outlook, but it is on the minds of concerned investors. And there are reasons to be optimistic when it comes to the economy as businesses and consumers have remained surprisingly resilient in the face uncertainty. However, should stagflation emerge, it could have material implications for consumers, businesses and the investment markets.

If you have any questions about this report, please reach out to your relationship manager.

¹Corbett, Michael. “Oil Shock of 1973-74.” Federal Reserve History. 23 November 2013.

²Schneider, Howard. “Stagflation on the radar for the US economy, but no repeat of the '70s.” Reuters. 25 March 2025.