Stagflation was an economic scourge of the 1970s that combined anemic economic growth, high inflation, and high unemployment. And once again there are warnings of a return, this time in a bond market worried about tariffs.
This peculiar set of circumstances has been an on-and-off concern for a few years. In May 2022, when the Federal Reserve’s actions to slow inflation were still unknown, experts anticipated the central bank to peak raising the federal funds rate at 2.5% in 2023 with growth slowing to 2% then. Stagflation would likely happen but last only a short time.
Time would show the benchmark interest rate to more than double the prediction, with unemployment remaining low and growth continuing. No stagflation.
Last year, the warnings picked up again. By March, Bank of America and JPMorgan Chase both thought stagflation was a definite possibility. CoStar Group thought stagflation would become a problem. "The current stark reduction in property income signals stagnation inside commercial real estate, with sluggish income growth averaging 3.6% across all sectors, barely outpacing the headline inflation rate of 3.4% in April 2024," it said.
Now, it isn’t experts but the collective U.S. bond market that is warning, reported Bloomberg. It’s an issue of tariffs. Short-dated Treasury yields lifted by as much as eight basis points over concerns about interest rates. In the meanwhile, longer-term yields fell over worries about inflation.
Since Trump spoke with the leaders of Mexico and Canada and announced the one-month delays of the tariffs on both countries, things have calmed a little. But not enough to leave everyone feeling that an economic downturn is unlikely.
“Risks of stagflation are elevated,” Jack McIntyre, portfolio manager at Brandywine Global Investment Management, told Bloomberg. “Anything growth-related needs to be looked at through the lens of uncertainty. Investment might get delayed until we get more clarity.”
More data has come out and is expected. The Bureau of Economic Analysis said last Thursday that GDP rose at an annual rate of 2.3% in the fourth quarter of 2024, with real GDP growth in Q3 of 3.1%.
January job numbers will come in on Friday. December’s were a big surprise to the upside, with 256,000 new positions. Still, a large swing is possible.
The only thing that seems certain at the moment is that it will take more data for anyone to get a better sense of what will happen.