The US economy faces a growing threat of stagflation, as inflation surges while economic growth slows. This phenomenon, last seen in the 1970s and early ’80s, has been fueled by “soft” data such as sentiment surveys and supply manager indexes.
According to Mark Zandi, chief economist at Moody’s Analytics, the converging factors are causing concern among consumers, business leaders, and policymakers. Long-run inflation expectations are at their highest level in almost 30 years, while general sentiment is seeing multi-year lows.
The Institute for Supply Manufacturing’s survey of purchase managers showed factory activity barely expanded in February, new orders fell by the most in nearly five years, and prices jumped by the highest monthly margin in more than a year. The Atlanta Federal Reserve’s GDPNow gauge downgraded its projection for first quarter economic growth to an annualized decrease of 2.8%.
The Fed may respond with interest rate cuts, but Zandi believes they will instead raise rates to combat inflation. “If it looks like true stagflation with slow growth, they will sacrifice the economy,” he said.
Mark Hackett, chief market strategist at Nationwide, warns that a “vicious circle” of activity created by swooning sentiment indicators could turn into a full-blown crisis. Economists and business executives see tariffs hitting prices for food, vehicles, electricity, and other items.
White House officials maintain that short-term pain will be dwarfed by long-term benefits from tariffs. However, economists caution that the stagflation term can manifest itself if not addressed.
The nonfarm payrolls report on Friday may provide important clues on where the economy is headed. If the jobs count is good, it could reinforce solid hard data. But if the report shows a softening labor market while wages hold higher, it could add to stagflation chatter.
Source: https://www.cnbc.com/2025/03/04/stagflation-fears-swirl-as-trump-tariffs-take-effect-and-economy-slows.html