The fear of stagflation can swirl as Trump’s tariffs work and the economy slows down

The fear of growth in the economy is accompanied by concerns about a revival of inflation, which could potentially rekindle an ugly state the US has never seen in 50 years.

Fear of “stagflation” has arisen as President Donald Trump appears to be determined to slap tariffs on those that come to the country while multiple indicators point to pullbacks of activity.

The double threat of higher prices and slower growth has sparked unease among consumers, business leaders and policymakers, not to mention investors who have recently dumped stocks and scooped up bonds.

“We’ve seen a lot of effort into the world,” said Mark Zandy, chief economist at Moody’s Analysis. “The result of the policy is higher inflation and weak economic growth – tariff policy and immigration policy.”

This phenomenon, which has not been seen since the dark days of hyperinflation and drooping growth in the 1970s and early 80s, has recently emerged in “soft” data, such as sentiment surveys and supply manager indexes.

Long-term inflation expectations are at the highest level in nearly 30 years, at least among consumers, but general sentiment has seen multi-year lows. A Commerce Department report on Friday said consumer spending fell the most in January in almost four years, despite revenues rising sharply.

On Monday, a research institute on purchasing managers in supply manufacturing showed that while factory activity was barely expanding in February, new orders fell the most in nearly five years, with prices jumping to the highest monthly margin in more than a year.

Following the ISM report, the Atlanta Federal Reserve’s GDPNOW gauge downgraded its first quarter economic growth forecast to a 2.8% annual decline. If that continues, it will be its first negative growth number since the first quarter of 2022, the worst charge since the joint closure in early 2020.

“Inflation expectations are rising. People are nervous and uncertain about growth,” Zandi said. “In the direction, we’re moving towards stagflation, but we don’t get close to stagflation in the ’70s and ’80s because the Fed doesn’t allow it.”

In fact, the market is likely to lose three-quarters of the key borrowing speed this year as a way to lead the economy slowdown.

But Zandy thinks the Fed’s response might do the exact opposite – in the vein of former committee chair Paul Bolucker, who actively hiked in the early ’80s and dragged the economy into a recession, raising the fees to shut down inflation. “If it looks like a slow, true stag, they sacrifice the economy,” he said.

Selling shares

The convergence factor has caused a wave on Wall Street, where stocks went into sale mode this month, erasing profits made after Trump won the November election.

The Dow Jones industrial average fell again on Tuesday, with about 4.5% off early March, but sales were particularly rushed and CBOE was not felt Volatility Indexthe market’s fear scale was around 11pm on Tuesday, not far above that long-term average. The market was outside the lowest session range for afternoon trading.

“This certainly isn’t the time to press the panic button,” said Mark Hackett, chief market strategist across the country. “At this point, I’m still at camp, but this is a healthy reset of hope.”

However, stocks are not the only ones showing signs of fear.

After a surge since September, the Ministry of Finance’s yields have recently fallen. The benchmark’s 10-year note yield fell to about 4.2%, about half the peak in January, and below three months of notes, it is a reliable recession indicator that dates back to World War II, known as the inverted yield curve. As yields move in the opposite direction of price, a decrease indicates that investors’ desire for bond bonds will increase.

Hackett said he fears a “vicious cycle” of activities created by indices of sentimental accusations that could turn into a full-fledged crisis. Economists and business executives are looking at tariffs reaching prices for assortment of food, vehicles, electricity and other items.

Stagflation “certainly needs to be more careful than ever,” he said. “We have to look at it. It’s a breakdown of emotions, a change in the way people see things, and the level of emotions is now so high that it starts to affect our behavior.”

The White House sees “The Biggest America”

White House officials argue that short-term pain is prolonged by long-term benefits. Trump has promoted his duties as a way to create stronger manufacturing bases in the US, a primarily service-based economy.

Commerce Secretary Howard Lutnick admitted in an interview with CNBC on Tuesday that “there may be a short-term price movement, but it will be completely different in the long run.” Market-based inflation expectations are in line with that sentiment. One metric measures the spread between Treasury yields against inflation in the nominal five years, and is at its lowest level in nearly two years.

“This will be America’s biggest. We have a balanced budget. Interest rates will be destroyed. 100 basis points, 150 basis points lower,” Lutnick added. “This president is trying to provide all this and drive manufacturing here.”

Similarly, Treasury Secretary Scott Bescent told Fox News that there was a “transition period,” saying the administration’s focus is more on Main Street than Wall Street.

“Wall Street is great. Wall Street can keep going well, but we’re focused on small businesses and consumers,” he said. “We’re going to readjust the economy. We’re going to take manufacturing jobs home.”

A key clue as to where the economy is heading should come from Friday’s non-farm pay report. A good job count could reinforce the notion that hard data remains solid even if sentiment changes.

However, if the report shows that the labour market is softening while wages are high, it could be added to the chatter of stagflation.

“We have to observe. By talking about it, the stag terminology can reveal some of it in itself,” said Hackett, a national strategist. “I’m not in a camp where we’re expanding, but that’s the disaster scenario.”