Stagflation: Why People Are Talking About It Again?
If you have been hearing the word "stagflation" pop up in the news or on social media lately, you are not alone. It sounds like a made-up word that does not make any sense, but it is a very real (and very tricky) economic problem. And with recent political and economic shifts, especially with the drastic policies associated with Trump Administration, many experts are warning that the U.S. might be inching toward another bout of stagflation.
But what exactly is stagflation? Why does it matter? And should you be worried?
Let’s examine what this economic condition means, look back at the last time it happened in the U.S., and examine how recent policies—especially some of Donald Trump’s—might be steering us in that direction again.
What Is Stagflation?
Stagflation is a combination of two things you do not usually see together: high inflation and a slow or shrinking economy.
- Inflation means prices are rising—your groceries, rent, gas, everything costs more.
- Stagnation means the economy is not growing. People are not getting raises, businesses are not hiring, and job opportunities dry up.
Put them together, and you’ve got stagflation: a painful combination where things cost more, but you're earning less—or worse, out of work. The reason it is so dangerous is because the usual tools to fix the economy can actually make things worse. For example:
- To fix inflation, the government usually raises interest rates—which can slow growth even more.
- fix slow growth, the government usually lowers rates or increases spending—but that can drive inflation even higher.
It is a catch-22 situation that is difficult to get out of once you are in it.
When Did Stagflation Happen Before?
The most famous example of stagflation in the U.S. happened over 50 years ago in 1973 and lasted through the early 1980s. Here are the main events that caused it to occur:
1. The Oil Crisis
In 1973, OPEC (a group of major oil-producing countries) cut off oil exports to the U.S. in response to U.S. support for Israel in the Yom Kippur War. This caused oil prices to quadruple, which meant everything got more expensive— including transportation, food, and heating your home.
2. Printing Too Much Money
The U.S. had been spending heavily on the Vietnam War and new social programs, and the government did not raise taxes to pay for it. Instead, they printed more money. When more money is chasing the same amount of goods it leads to inflation.
3. Ending the Gold Standard
In 1971, President Nixon took the U.S. off the gold standard, which had kept the dollar stable. This made it easier to print money—but also added to uncertainty and inflation.
4. Wages and Prices Spiral
As prices went up, workers demanded higher wages. Companies then raised prices to cover higher payrolls. This cycle repeated, pushing inflation even higher.
By 1980, inflation was above 13%, unemployment hit 7.5%, and mortgage rates soared to over 18%.
How Did We Get Out of It?
Paul Volcker, the chairman of the Federal Reserve in the late 1970s did something bold: he raised interest rates to nearly 20% in an effort to stamp down inflation. It worked—but in doing so, caused a deep recession.
In the early 1980s, the economy finally stabilized. The Reagan administration also pushed tax cuts and deregulation, hoping to jumpstart business investment. Over time, inflation came down and growth returned. But it took over a decade—and a lot of pain—to break the cycle.
Could It Happen Again?
The Federal Reserve has been walking a tightrope: trying to cool inflation without causing a recession. At the start of 2025, the “soft landing” (bring down inflation while avoiding a recession) were in their sites—but many economists worry that the severe policies, enacted by the Trump Administration could reverse the hard earn gains made by the Federal Reserve and make stagflation more likely.
The Impact of Trump’s Policies
Whether you support Trump or not, it is important to understand the economic impact of his policies—past and proposed. Several of them could increase the chances of stagflation:
1. Tariffs (Trade Wars)
Tariffs are basically a tax on imports. Businesses either eat that cost or pass it on to consumers. Either way, it raises prices—inflation—while also slowing trade and growth.
As most of you know by now, President Trump aggressively expanded his use of tariffs as a central tool of economic and foreign policy. In February, he reinstated 25% tariffs on steel and 10% on aluminum imports. He then imposed 25% tariffs on most imports from Mexico and Canada, citing national security concerns tied to immigration and drug trafficking as the reason for doing so. On April 2, branded as “Liberation Day,” Trump announced a sweeping 10% universal tariff on all U.S. imports (the highest in over a century), with higher rates (up to 50%) on products from 57 specific countries, including China. Just a week later, the administration raised tariffs on Chinese imports to an effective rate of 145%, triggering strong retaliation from China, including new tariffs on U.S. goods and restrictions on rare earth exports.
2. Immigration Restriction
Another key Trump policy has been cutting legal immigration, which reduces the number of available workers. While that may sound like it helps American workers, it also means labor shortages in industries like farming, construction, and caregiving.
When there aren’t enough workers, wages go up—but so do prices. And fewer workers mean less economic output, which slows growth.
3. Unfunded Tax Cuts
The 2017 Tax Cuts and Jobs Act lowered corporate and income tax rates but wasn’t offset by spending cuts. This resulted in an estimated $2 trillion increase in the national debt over 10 years.
High government debt can make it harder to respond to crises—and over time, it can also put upward pressure on inflation, especially if the government continues to borrow heavily.
Where Are we Now?
It is not certain that we are headed towards stagflation—but we are at a crossroads. Economists are watching closely for signs that high inflation will stick around and growth will decline. As of April 2025, the U.S. economy is exhibiting signs that raise concerns about a potential move toward stagflation:
1. Inflation Trends: Short-term inflation expectations have risen to 3.6% in March, influenced by recent tariff implementations. However, long-term expectations remain relatively stable, with three-year forecasts steady at 3% and five-year projections dipping to 2.9%
2. Economic Growth: Forecasts for GDP growth in 2025 have been revised downward, with some projections falling below 1%, indicating a slowdown in economic expansion
3. Unemployment Rates: Unemployment is anticipated to rise above 5%, up from the current 4.2%, suggesting a weakening labor market
4. Tariff Policies: The recent implementation of widespread tariffs has introduced significant economic shocks, leading to increased costs for consumers and businesses, and contributing to inflationary pressures .
5. Consumer Sentiment: Consumer confidence has declined sharply, with the University of Michigan's index dropping to 50.8 in April, nearing historic lows. This decline reflects growing concerns about inflation and job security .
How Can You Protect Yourself?
Stagflation is a macroeconomic problem—and is a reminder that we must be prudent with our finances and take measures to protect ourselves from disruptive events. Some things we can do are:
• Keep an emergency fund. In times of uncertainty, cash is your friend.
• Be careful with debt. Higher interest rates make borrowing more expensive.
• Diversify investments. A mix of stocks, bonds, real estate, and inflation-protected assets (like TIPS) can help you weather volatility.
• Focus on long-term goals. Do not try to time the market. Stick with a plan that matches your investment horizon and risk tolerance.
Final Thoughts
Stagflation is not a guarantee—but as the events of the 1970s taught us, it can happen again and quickly. With inflation still high and political leaders floating dangerous policies that could restrict growth while raising prices, it is something to take seriously. The Market reaction last week is an indication of the potential destructiveness of this Administration’s economic policies.
The best thing you can do is stay informed and make smart, steady financial choices: Do not panic and do not chase trends.
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This content is developed from sources believed to be providing accurate information, and provided by Attune Financial Planning. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.