The US stock market has been performing exceptionally well over the past year, driven by strong corporate earnings, government spending, and rising productivity. However, financial markets are now questioning whether this era of American exceptionalism is coming to an end due to a mix of slowing economic growth and rising consumer prices, known as stagflation.
Stagflation is a rare phenomenon where inflation and economic stagnation occur simultaneously, making it challenging for policymakers and investors to avoid its effects. The last major episode of stagflation in the US occurred in the 1970s, when oil shocks and policy missteps triggered runaway inflation and a weak economy.
The recent economic indicators suggest that a similar pattern may be unfolding. Inflation remains above the Federal Reserve’s 2% target, while consumer sentiment has dropped sharply, business activity is slowing, and key labor market indicators are weakening. The University of Michigan Consumer Sentiment Index fell 11% last month, with consumers growing increasingly concerned about their financial prospects.
The prospect of stagflation puts the Federal Reserve in a challenging position, as it must balance the risk of tightening monetary policy to control inflation against the potential for worsening economic growth. If policymakers ease policy too soon, inflation could accelerate further.
Investors can prepare for stagflation by considering inflation-protected sectors such as commodities and infrastructure. Historically, gold and other hard assets have performed well during stagflationary periods. The Trump administration’s approach will play a crucial role in avoiding stagflation, as it must balance addressing inflation with preserving consumer demand.
Ultimately, the risk of stagflation is not inevitable, and policymakers can take steps to mitigate its effects. However, financial markets know that stagflation is a lose-lose situation, and investors should be cautious in their approach.
Source: https://www.forbes.com/sites/garthfriesen/2025/03/29/stagflation-warning-signs-emerge-in-the-us-economy