As President Donald Trump’s aggressive trade strategies and enduring inflationary pressures stir unease about a potential return to stagflation—a term evoking the economic malaise of the 1970s—investors and economists grapple with mixed signals from the U.S. market.
Despite a resilient market mood driven by Trump’s growth-focused initiatives, the intersection of stagnant economic growth and persistent inflation is becoming difficult to ignore.
Stagflation is increasingly seen as a viable risk due to policies that threaten to dampen consumer demand, all while ongoing inflation restricts the Federal Reserve’s flexibility. According to Jack McIntyre from Brandywine Global, the threat is no longer negligible and must be taken seriously.
Echoing these sentiments, Innovator Capital Management’s Tim Urbanowicz identifies tariffs as a looming threat, potentially acting as an economic drag by imposing indirect taxes on consumers and squeezing profits.
Recent data has only heightened these worries, presenting a stubborn inflation rate that hit 3% annually in January, amid record fast consumer price increases since August 2023. Such factors, juxtaposed with tariff-induced inflationary pressures, place U.S. growth in a precarious position.
According to a Bank of America survey, apprehension towards stagflation is at a seven-month peak among global fund managers, though confidence in stocks remains buoyant, viewing trade wars as an unlikely scenario.
In February, Trump delayed new tariffs on Canadian and Mexican imports, but imposed a 10% duty on Chinese goods and sanctioned a 25% levy on global steel and aluminum. Plans are underway for reciprocal tariffs on nations taxing U.S. imports, with upcoming 25% levies on autos, semiconductors, and pharmaceuticals.
While some investors see the economic impact as temporary, others, like Maddi Dessner from Capital Group, suggest tariffs could eventually boost industries by reducing competition, albeit initially raising prices. This shift informs their projection of 10-year Treasury yields at 3.9% over 20 years, up from last year’s 3.7% estimate.
Some investors like Capital Group’s head of asset classes, Maddi Dessner, project complex outcomes, balancing potential immediate price hikes against eventual economic benefits, reflected in a revised prediction for 10-year Treasury yields.
Despite the mounting unease, market observers urge caution before concluding a stagflation scenario is inevitable, as the latest data on core inflation is significantly lower than the 1970s average, when it hovered around 7% annually.
