Stagflation Sparks New Fears For US Economy

Economists are sounding the alarm that the U.S. may be sliding into a period of stagflation—a toxic mix of stalled growth, rising unemployment, and accelerating inflation that has historically proven hard to escape.

On Sunday, Richard Clarida told Bloomberg Surveillance that there was already “a whiff of stagflation” in the U.S.

Clarida, global economic advisor at investment management firm PIMCO and former vice chairman of the U.S. Federal Reserve, said that inflation would be “mechanically moving up” as the administration unveils new tariffs, and questioned whether a period of slower growth and higher prices would last for a few months, or whether this was “the new story” the Fed would have to deal with for years to come.

Why It Matters

Alongside broader concerns over a potential recession, the term stagflation has increasingly featured in warnings issued over the health and trajectory of the U.S. economy. As Americans continue to grapple with the impacts of rising—albeit slowing—inflation, a broader economic slowdown and worsening labor market conditions could further strain already stretched household budgets.

What To Know

The last time America faced stagflation was in the 1970s, a turbulent decade defined by oil price shocks, unemployment peaking at 9 percent in 1975, and inflation surging past 13 percent by 1980.

In line with Clarida’s “whiff” comments, recent surveys and policymaker statements point to a challenging period ahead for the U.S. economy, with troubling signs emerging across a range of soft and hard data points.

March surveys from the University of Michigan and New York-based think tank The Conference Board revealed a marked decline in consumer confidence. The former found that year-ahead inflation expectations had jumped to 5.0 percent, the highest reading since November 2022, while the latter’s Expectations Index—based on short-term economic optimism—dropped to its lowest level in 12 years.

However, the Bureau of Economic Analysis’ reading for February found consumer spending rebounded from a 0.3 percent decline in January to rise by 0.4 percent, though this was weaker than the 0.5 percent gain that economists had penciled, according to Trading Economics.

Meanwhile, business sentiment remains unsteady, with the National Federation of Independent Business’ (NFIB) Uncertainty Index rising 4 points to 104 in February—its second-highest reading since the index’s inception in 1973. The percentage of respondents who felt it was a good time to expand their business saw its sharpest monthly decline since April 2020 as concerns over labor costs and inflationary pressures intensified.

Labor market conditions appear steady for the time being, with the economy adding 151,000 jobs in February, according to the Bureau of Labor Statistics (BLS), ahead of January’s 143,000 but slightly below analyst forecasts, and unemployment rising to 4.1 percent from 4.0 percent.

Inflation also eased to a better-than-expected 2.8 percent in February from 3.0 percent in January, according to the most recent Consumer Price Index (CPI) report from the BLS.

However, inflationary concerns have been heightened by the introduction of new tariffs by the Trump administration, which Federal Reserve Chair Jerome Powell said accounted for a “good part” of the central bank’s heightened inflation forecast.

On March 19, policymakers at the Federal Open Market Committee raised inflation projections to an average rate of 2.7 percent for 2025, further from its 2.0 percent target, while keeping interest rates unchanged and revising down GDP growth forecasts to 1.7 percent from 2.1 percent in December.

In a press conference following the meeting, Powell said that the Fed’s “base case” was that the inflationary impact from tariffs would be “transitory,” but added that economic uncertainty was “remarkably high.”

According to Clarida, on Sunday, the “balance” in the Fed’s projections and its reluctance to cut interest rates was “because of the stagflation threat,” and the central bank will likely remain in “wait and see mode” until hard data points to an undeniable deterioration of economic conditions.

What People Are Saying

Stephen Browne, deputy chief North America economist at Capital Economics, said that Fed officials were “underestimating the extent to which tariffs are likely to push up inflation.”

President Trump, in response to a reporter’s question on stagflation fears, said on March 31 to reporters: “I haven’t heard that term in years. I don’t know anything about [that]. This country is going to be more successful than it ever was. It’s going to boom, we’re going to have boom town USA. We’re going to boom.”

Joseph Brusuelas, chief economist for tax and consulting firm RSM US, wrote: “The Federal Reserve’s decision on [March 19] to hold rates steady amid rising uncertainty strongly implies that the central bank’s forecasters are pointing to the impact of a trade shock that has already started and is going to get turbocharged with new tariffs on April 2.”

“A slower pace of growth, sticky service inflation and the current trade shock are creating the conditions for stagnation at best and stagflation-lite at worst,” he added.

Richard Clarida, former vice chair of the Federal Reserve, told Bloomberg Surveillance: “We already have at least a whiff of stagflation right now. Inflation mechanically will be moving up with the tariffs.”

“I don’t see [the Fed] acting pre-emptively, as the Powell Fed did when I was there in 2019,” Clarida added. “We cut rates because the economy was slowing on the uncertainty, but inflation was one-and-a-half percent, it wasn’t close to three. So it’s a different set of conditions now.”

What Happens Next?

On Wednesday, President Trump is set to deliver a speech at the White House Rose Garden and is expected to unveil details of the administration’s reciprocal tariffs. In addition to these measures, Trump has announced a 25 percent blanket tariff on all imports from countries purchasing oil and gas from Venezuela, which will come into effect “on or after April 2, 2025.”

Trump’s 25 percent duties on automobiles are scheduled to take effect at midnight on Thursday.