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Consumers are currently navigating a challenging economic landscape marked by high inflation and stagnant wages, raising concerns about the potential emergence of stagflation.
Stagflation—a term coined to describe the simultaneous occurrence of rising inflation, high unemployment, and slowing economic growth—has become a focal point for economists discussing the future. Recent assessments indicate that current conditions could lead to stagflation, driven in part by the tariff policies implemented during the Trump administration.
Brett House, a professor of professional practice in economics at Columbia Business School, expressed concern about the risks posed by these tariffs, stating that they could contribute to both increased inflation and diminished economic growth. This sentiment is echoed by Greg Daco, chief economist at EY Parthenon, who suggests that the risk of stagflation is more significant now than at any time in the last four decades.
Consumer confidence appears to be waning, with Diane Swonk, chief economist at KPMG, noting that many individuals feel insecure about their jobs and are increasingly anxious about future inflation.
Implications of Stagflation in Today’s Economy
The 1970s were characterized by severe stagflation, a period when rising oil prices led to widespread shortages and long queues at gas stations as inflation surged amid an unstable job market. While rising oil prices significantly impacted that era, some economists suggest that monetary policy shifts were also central to the stagflation experienced during that decade.
This economic turmoil ultimately forced Federal Reserve Chairman Paul Volcker to impose stringent monetary policies in an attempt to control inflation, leading to a severe recession marked by high unemployment rates. Today, however, analysts like Dan Skelly from Morgan Stanley Wealth Management argue that a repeat of such stagflation is less likely due to the U.S. economy’s reduced dependence on foreign oil and a diminished power of labor unions to drive wage increases.
Despite this, the uncertainty surrounding tariffs could hinder both corporate investment and consumer spending, suggesting a potential slowdown in economic growth. Stagflation could emerge without a formal recession, according to House, and forecasts from KPMG predict a mild recession with inflation leveling off in the coming months.
Daco warns that if stagflation occurs, it would present a dual challenge of rising unemployment coupled with escalating costs, leading to significant hardships for numerous families and businesses.
Preparing for Stagflation
As the specter of stagflation looms, American consumers might experience slower income growth, diminished job opportunities, and rising prices, all of which complicate household budgeting efforts. Sarah Foster, an economic analyst at Bankrate, advises consumers to take proactive measures akin to those used during a recession. This includes making prudent purchasing decisions, especially concerning large items that could be impacted by tariffs.
Foster emphasizes the importance of sticking to a budget and avoiding impulsive buying while encouraging consumers to prioritize paying off high-interest debt and bolstering emergency savings. Maintaining a financial safety net, ideally covering at least six months of expenses, becomes crucial in uncertain economic times. Thankfully, current higher interest rates still offer attractive returns on savings accounts.
For investors holding cash assets, Skelly suggests it might be time to begin reallocating funds towards equities, especially given recent market fluctuations. He warns against making rash investment decisions but encourages a gradual shift into the market.
Potential for an Economic Shift
Stagflation is not an inevitability, and recent history demonstrates that such economic conditions can be avoided. In a 2022 survey, a substantial majority of economists deemed stagflation a long-term threat, but it was sidestepped at that time thanks to a combination of stable growth, diminishing inflation, and a strong job market.
Contemporary risks are largely attributed to recent federal policy decisions, and Daco believes that the current administration can mitigate these by reducing uncertainty, easing immigration restrictions, and avoiding new tariffs on key trading partners. House adds that the Trump administration entered 2025 with a relatively strong economy but cautions that policy changes may jeopardize this progress.
The administration’s ability to address these concerns will be pivotal in preventing stagflation from materializing, highlighting the intricate connection between government policy and economic stability.
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