The effect of all these tariffs is to abruptly choke off Americans’ access to affordable goods and materials from overseas. According to an estimate from the Budget Lab at Yale, Trump’s tariffs are poised to raise America’s price level by 2.3 percent in 2025 — a spurt of inflation that would cost the average US household $3,800. President Donald Trump’s decision to impose large tariffs on all foreign imports has triggered a global trade war, stock market collapse — and predictions of an imminent recession. But one measure seems to support the idea that stagflation should not be a top-of-mind concern for investors at the moment. In the 1970s, economist Arthur Okun developed an index to measure stagflation that is calculated by adding the unemployment rate to the annual inflation rate. “That this index is widely referred to as the ‘misery index’ shows how painful stagflation is,” Brochinm says.
Juggling Trade-offs and Surmounting Hurdles
The UK government implemented various policies, such as wage controls and austerity measures, to combat stagflation and restore lexatrade review economic stability. Rental properties would have made sense in the 1970s, but in the post-pandemic inflationary period, rental property investing was a tricky business. On the one hand, housing prices (and average rent prices) rose on an annualized basis, but many cities and states implemented eviction moratoriums (meaning you couldn’t evict tenants who weren’t able to pay their rent). Powell signaled Wednesday the Fed will assess whether high inflation or a slow economy poses a greater risk for the U.S. It has yet to announce if, when, or by how much, it will adjust interest rates. All of these conditions raise concerns the U.S. economy could be entering a period of stagflation.
Stagflation in the post-pandemic economy?
In some cases, we earn commissions when sales are made through our referrals. These financial relationships support our content but do not dictate our recommendations. Our editorial team independently evaluates products based on thousands of hours of research. Stagflation, a term derived from the combination of “stagnation” and “inflation,” represents a significant economic concern. Although it is a relatively rare phenomenon, it is essential to understand its implications and potential consequences.
How often does stagflation occur?
The crisis occurred when the United Kingdom tried to redeem $3 billion for gold. The United States didn’t have that much gold in its reserves at Fort Knox. That sent the price of the precious metal skyrocketing and the value of the dollar plummeting which sent import prices up even more. But the precise consequences of Trump’s tariffs are fake double top pattern difficult to anticipate, especially since they could trigger unpredictable responses from America’s trade partners; already, China has imposed 34 percent tariffs on US goods.
Preparing your business for stagflation
The stagflation meaning in economics, a term that seems almost paradoxical at first glance, is an economic conundrum that has puzzled economists and policymakers for decades. Imagine an economic scenario where inflation is soaring high, economic growth is stagnating, and unemployment remains persistently elevated. A long-lasting surge in prices has been quite rare in modern history and until this year, the inflation rate hadn’t been above 5% for 6 months or more since the 1980s. Experts say that such periods of sustained, high inflation are most likely caused by either a global supply shock or poorly-guided economic policies. Notably, though, the government strategy of increasing global liquidity functioned to inhibit deflation, which is, in fact, a much more serious risk to the health of the economy than high levels of inflation.
- Combined with economic growth of just 1 to 2 percent, this situation raised fears of stagflation, which could occur if the economy continued to stagnate as inflation persisted.
- Under Bretton Woods, most countries agreed to peg the value of their currencies to either the price of gold or the U.S. dollar.
- The severity of stagflation can be measured by the “misery index,” a straightforward sum of the inflation and unemployment rates.
- At the macroeconomic level, policymakers can combat stagflation by diminishing the economy’s reliance on oil, a significant contributor to stagflation due to escalating oil prices.
This situation was produced by the tail end of the Barber Boom (itself created by the 1972 budget of Conservative politician Anthony Barber) as well as the increase in oil prices, as was the case in the United States. The 2025 Trump tariffs have revived concerns about this economic phenomenon in a way not seen since the 1970s, with Federal Reserve officials warning about higher inflation alongside slower growth. For individuals, stagflation means the double burden of shrinking job opportunities while the cost of living climbs—a combination that makes planning one’s financial future as perilous as stagflation is to counter at the national level. Those same tariffs raising prices in the US are likely to knock consumer confidence, which could weaken economic growth. The term was coined in 1965 by a former British chancellor of the exchequer, Iain Macleod, and rose to prominence in the 1970s and 1980s as its effects were felt across the globe, taking economists by surprise.
- The question of whether today’s economy would face similar consequences during a stagflationary period remains uncertain.
- Conversely, prioritizing growth through fiscal measures can amplify inflationary pressures.
- When economic growth is slow or a recession hits, the Federal Reserve can alter monetary policy to encourage spending in a bid to stimulate sluggish economies, as it did in the wake of the 2008 financial crisis.
- Meanwhile the stock markets are taking a beating, with the Dow Jones Industrial Average, Nasdaq and S&P all ending March in the red.
- Unlike typical recessions or periods of high inflation, stagflation defies conventional economic solutions because addressing one aspect typically worsens the others.
This all comes together as a picture of a potentially more stagnant economy, but not necessarily a more inflationary one. In 2008, the Zimbabwean government printed so much money it went beyond stagflation and turned into hyperinflation. “The risk of stagflation just took off like a rocket, particularly if you factor in retaliation by most trading partners,” Olu Sonola, the head of US economic research at Fitch Ratings, told Barron’s. Today, however, no foreign power is imposing a supply shock on the United States. Here is a brief guide to what stagflation is, why it’s so feared, how it occurs, and whether Trump’s policies will cause it.
Fiscal policies involve government interventions like altering taxes and public expenditures. Authorities might opt to cut public spending to curtail demand and rein in inflation. Those supply shocks followed a period of accommodative monetary policy in which the Federal Reserve grew the money supply to encourage economic growth. Meanwhile, global economic growth slowed sharply in the 1970s—a decade marked by two different recessions in the U.S. and the lead-up to a third one that began in 1980. Bad policy, of course, can also have disastrous economic effects, including stagflation.
In the wake of Trump’s tariff announcement last week, JP Morgan raised its odds of a US recession to 60 percent, up from 40 percent. Coryanne Hicks is an investing and personal finance journalist specializing in women and millennial investors. Previously, she was a fully licensed financial professional at Fidelity Investments where she helped clients make more informed financial decisions every day. She has ghostwritten financial guidebooks for industry professionals and even a personal memoir. She is passionate about improving financial literacy and believes a little education can go a long way.
And former Fed Chair Ben Bernanke said in May 2022 that the U.S. could be in for a period of stagflation. In addition how to invest in buy & sell us stocks in the philippines to the World Bank, other major institutions—like Goldman Sachs and BlackRock—also warned about stagflation risks. After the mid-twentieth century, and particularly during the 1960s and 1970s, stagflation gained wider recognition as a serious problem.
Stagflation combines stagnant economic growth, high unemployment, and persistent inflation. It defies traditional economic models, which typically show inflation rising during strong economic growth and falling during recessions. First named in the 1960s, stagflation shattered long-held economic theories when it emerged most dramatically during the 1970s oil crisis. With companies already planning layoffs, Americans faced the prospect of an economic challenge that generations of policymakers had largely avoided. Inflation, a concept we have become all too familiar with in recent years, describes an increase in consumer prices. The combination of the two creates a miserable environment in which fewer people have jobs, while the cost of goods and services skyrockets.
Forget inflation; stagflation is the back-to-the-future buzzword on Wall Street, and it could spell bad news for retirees. Insights on business strategy and culture, right to your inbox.Part of the business.com network. Consumers can’t spend, businesses have fewer customers, and the cycle repeats. Learning the history of the gold standard will help you understand why the dollar then was backed by gold and why it isn’t currently. Inflation tripled in 1973, rising from 3.6% in January to 8.7% in December. It rose to a range of between 10% and 12% from February 1974 through April 1975.
“Headline consumer price increases have already slowed sharply, but it takes two full years for monetary policy actions to be fully felt in consumer prices.” “At the same time, inflation reduces the purchasing power of households and consumer confidence declines, further impacting economic growth,” he says. “In such economic conditions, businesses and individuals face difficulties in planning and making investment decisions.”
Historical examples, like the 1970s oil crisis, highlight the severe impact of stagflation on societies. In addition, the inherent difficulties in responding to supply shocks—neither the government nor the Fed can solve logistics issues—make policy blunders more likely. Standard tools, like raising interest rates to combat inflation, can be less effective when inflation is driven by supply constraints rather than excessive demand.