Stagflation ‘whiffs' are back — but what does it mean?

The Hill

01-04-2025

(NEXSTAR) — Economists last hinted that stagflation may be on the horizon for Americans in 2022 amid high inflation and a weaker job market, but it never arrived. Now, stagflation has found its way back into conversations amid the ongoing trade war and a shaky Wall Street.
Richard Clarida, former Federal Reserve Vice Chairman turned global economic advisor at Pacific Investment Management Co. and Columbia University professor, recently told Bloomberg there is 'already at least a whiff of stagflation right now' in the U.S. Ed Yardeni, president of Yardeni Research, lifted his probability of the country entering a stagflation period from 35% to 45% in a note to clients on Monday, according to Yahoo! Finance.
Described as 'the bitterest of economic pills,' stagflation does not have a formal definition. It is generally brought on by high inflation and a weak job market.
Mark Zandi, chief economist at Moody's Analytics, explained to the Associated Press in 2022 that, in his mind, the U.S. is experiencing stagflation when the unemployment rate reaches at least 5% and consumer prices have surged 5% or more from a year earlier.
The U.S. experienced a phase of stagflation in the 1970s when Saudi Arabia and other oil-producing countries imposed an oil embargo on the United States and other countries that supported Israel in the 1973 Yom Kippur War.
It caused oil prices to jump and stay high while the cost of living grew more unaffordable for many. The economy reeled. Each year from 1974 through 1982, inflation and unemployment in the United States both topped 5%.
Stagflation, should it emerge, is hard for the Federal Reserve because typically policymakers would lift rates — or keep them high — to combat inflation. Yet if unemployment also rises, the Fed would usually cut rates to reduce borrowing costs and lift growth.
Despite concerns, the U.S. does not appear to have reached stagflation in 2025.
The latest jobs report from the U.S. Department of Labor, published in early March, listed unemployment at 4.1%. A survey of forecasters by the data firm FactSet shows that is only expected to rise slightly to 4.2% when the jobs report for March is released on Friday.
Consumer prices are up 2.8% over February 2024, data from the Labor Department shows. That's down from 3% in the previous month.
Economics experts have warned that President Donald Trump's anticipated tariffs, expected to come on Wednesday, could put more pressure on consumers, though.
A measure of economic policy uncertainty maintained by Nicholas Bloom, a Stanford University economist and two colleagues, is at its highest level — outside of the pandemic — since its inception in 1985.
When businesses are unsure about where economic policy is headed, they are more likely to put major spending projects on hold and slow hiring, Bloom said. And when unsure, consumers typically take a more cautious approach to spending.
Clarida told Bloomberg that inflation is expected to go up, and goods prices are rising even before the tariffs take hold. He explained, however, that it's unlikely the Federal Reserve will take any action before the potential tariffs impact the economy.
Fed officials will almost certainly keep their key rate unchanged at their meeting this week. Once the meeting concludes Wednesday, they will release their latest quarterly economic projections, which will likely show they expect to cut their rate twice this year — the same as they projected in December.
Meanwhile, Goldman Sachs has lifted its forecast for the odds of a U.S. recession happening in the next 12 months to a 35% chance. While up from the previous 20%, experts suggest a recession is still less likely than not.