Economists claim that consumers may now face a new threat amid rising prices — “stagflation.” Stagflation is an economic term used to refer to a combination of rising inflation, slower economic growth and high unemployment.
“The Trump White House tariff policy has certainly increased the risk of both higher inflation and lower growth,” said Brett House, professor of professional practice in economics at Columbia Business School. Greg Daco, chief economist at EY Parthenon and vice president at the National Association for Business Economics claimed that the risk is now more pronounced than any time in the past 40 years, according to CNBC.
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Stagflation was a major problem in the U.S. in the 1970s, when the nation was grappling with the cost of the Vietnam war, and the loss of manufacturing jobs. While the 1970s stagflation is associated with higher oil prices, some economists argue it was actually caused by monetary fluctuations. This prompted the Federal Reserve Chairman Paul Volcker to implement a dramatic tightening of monetary policy in the late ’70s and ’80s known as the “Volcker shock.”
While inflation did come down as the Fed pushed interest rates higher, the central bank’s moves also prompted a severe recession — often defined as two consecutive quarters of negative gross domestic product growth — and higher than 10% unemployment.
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According to Dan Skelly, head of Morgan Stanley Wealth Management market research, stagflation would not happen the same way in the present day, because the U.S. is no longer dependent on foreign oil. Skelly also claims that unions, which prompted wage price spirals back then, are no longer as big a portion of the private workforce today. The uncertainty around tariffs would likely affect consumer and corporate confidence, and lead to growth slowdown.
While the International Monetary Fund (IMF) has stated that the uncertainty caused by tariffs would not lead to a recession, stagflation might lead to a challenging economic period with slower income growth, reduced employment prospects, higher unemployment and higher prices. To prepare for stagflation, consumers would need to take all the steps they would in a recession as well as the steps they would take when prices are rising, said Sarah Foster, economic analyst at Bankrate.