Stubborn inflation and President Donald Trump's tough trade policies have revived fears of stagflation—a troubling combination of slow growth and persistent inflation that afflicted the U.S. in the 1970s. While markets are positive about Trump's growth-focused agenda, concerns have resurfaced about the return of stagflation, as potential trade conflicts and tariffs loom.
Jack McIntyre, a portfolio manager at Brandywine Global, stated that "Stagflation has definitely re-emerged as a possibility because we have these policies that could hurt consumer demand even while persistent inflation limits the Federal Reserve's ability to maneuver."
A recent uptick in inflation, with a monthly rate not seen since 2023, has brought the annual inflation rate to 3%. This, combined with Trump's tariffs potentially adding inflationary pressures, poses a risk to U.S. economic growth.
Tim Urbanowicz, chief investment strategist at Innovator Capital Management, expressed more concern about stagflation than inflation, citing the impact of tariffs on consumers, profits, and overall economic growth.
According to a Bank of America survey, the anticipation of stagflation among global fund managers has reached a seven-month high, even as they remain optimistic about stocks. Despite Trump's delay in imposing new tariffs on Canada and Mexico, concerns linger about the economic implications of his trade policies.
Guneet Dhingra, head of US rates strategy at BNP Paribas, cautioned that the market has been "complacent" regarding the risks of stagflation, suggesting ways for investors to hedge against higher inflation.
While some believe that tariffs may have a temporary negative impact on growth, Maddi Dessner from Capital Group suggested that tariffs could spur certain industries in the long run while also posing initial price pressures.
Mark Zandi, chief economist at Moody's Analytics, warned about underestimating stagflation risks, noting that Trump's proposed large-scale deportations could worsen inflation. Matthew Bartolini of State Street Global Advisors highlighted gold as a valuable asset in a stagflationary environment, along with cash reserves. McIntyre emphasized the importance of monitoring developments before making significant investment adjustments.