Stagflation Warning Signs: Is History Repeating Itself?
Stagflation Warning Signs: Is History Repeating Itself?
Stagflation Warning Signs: Is History Repeating Itself?
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Economic forecasters and market watchers have recently revived a term most Americans haven't worried about since the 1970s: stagflation.
This economic phenomenon—combining stagnant economic growth, high unemployment, and high inflation occurring simultaneously—created years of economic pain during that decade.
Today, certain indicators suggest we may be facing similar risks.
What Is Stagflation?
Stagflation is an economic phenomenon characterized by a combination of stagnant economic growth, high unemployment, and high inflation occurring simultaneously.
This creates a paradoxical scenario where both inflation and unemployment rise together, leading to an overall stagnation of economic activity. Unlike typical recessions where slowing demand naturally suppresses inflation, stagflationary environments feature declining economic activity without the benefit of price relief.
Stagflation presents a policy dilemma, as measures to curb inflation—such as tightening monetary policy—can exacerbate unemployment, while policies aimed at reducing unemployment may fuel inflation.
Three Key Warning Signs to Watch
Recent economic data reveals concerning trends across several critical indicators that historically precede stagflationary periods.
1. Persistent Inflation Defying Expectations
The Federal Reserve's preferred inflation measure—core PCE inflation—has stopped its downward trajectory. Recent data shows core PCE inflation is forecast to edge higher to 2.7% from 2.6%. During its March meeting, the Federal Reserve raised its PCE inflation forecast for 2025 to 2.7% from 2.5% and for 2026 to 2.2% from 2.1%.
As Chair Powell noted in March 2025, "inflation has moved closer to our 2 percent longer-run goal, though it remains somewhat elevated". This inflation persistence despite economic uncertainty signals potential stagflationary pressures.
2. Rapidly Deteriorating Consumer Confidence
Consumer sentiment has fallen dramatically in recent months. The Conference Board's Consumer Confidence Index fell by 7.2 points in March 2025 to 92.9, marking the fourth consecutive monthly decline. The Expectations Index—based on consumers' short-term outlook—dropped 9.6 points to 65.2, the lowest level in 12 years and well below the threshold of 80 that usually signals a recession ahead.
As The Conference Board's Senior Economist noted, "Consumers' expectations were especially gloomy, with pessimism about future business conditions deepening and confidence about future employment prospects falling to a 12-year low". This weakening confidence presents serious growth concerns, especially as pessimism about the economy spreads to consumers' assessments of their personal situations.
3. Rising Long-Term Inflation Expectations
Perhaps most alarming is the significant increase in long-run inflation expectations. The University of Michigan's survey shows that long-run expectations have climbed sharply for three consecutive months, with median expectations jumping from 3.2 in January to 3.5 in February and further increasing to 4.1 in March 2025.
According to the University of Michigan report, "Inflation uncertainty has grown, likely due to economic policy shifts, though it remains slightly below 2022 levels. Other indicators, such as the 75th percentile and tail inflation expectations, are also trending upward, suggesting continued inflationary concerns".
The Federal Reserve's Dilemma
These warning signs create a particularly difficult environment for monetary policy. In March 2025, the Federal Open Market Committee decided to leave their policy interest rate unchanged. Chair Powell acknowledged that "we do not need to be in a hurry to adjust our policy stance, and we are well positioned to wait for greater clarity".
The FOMC dot plot shows that officials still see two more rate cuts coming in 2025 and another two in 2026, though expectations varied among members. However, Fed projections had a somewhat "stagflationary" feel with forecasts for growth and inflation moving in opposite directions.
As Powell noted, "If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly".
Are We Headed for Another Stagflationary Episode?
While the U.S. economy hasn't yet entered full stagflation by most technical definitions, the trajectory bears watching closely. In economic theory, there are two main explanations for stagflation: supply shocks, such as a sharp increase in oil prices, and misguided government policies that hinder industrial output while expanding the money supply too rapidly.
The stagflation of the 1970s provides important historical context. It was triggered in part by the 1973 oil crisis, when the Organization of Petroleum Exporting Countries (OPEC) constrained the worldwide supply of oil, causing prices to increase immediately by over 300%. However, some economists believe the seeds of 1970s stagflation were sown earlier, during the late 1960s, with rising expected inflation playing a key role.
History teaches us that resolving stagflation can be extraordinarily costly. The Volcker Fed ultimately conquered 1970s stagflation through aggressive monetary tightening that pushed unemployment to 10.8% in December 1982—higher than at the peak of the Great Recession in 2009. By limiting the money supply through increased interest rates, the Volcker Fed eventually brought inflation under control.
The coming months will be critical in determining whether these warning signs develop into something more serious or whether timely policy adjustments can navigate the economy toward a softer landing.
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