Wall Street is sipping on a cocktail of high inflation and slowing economic growth, fearing that the world’s largest economy could endure a bout of stagflation.
In the 1970s, the United States suffered a prolonged period of stagflation, an economic event comprising stubbornly high inflation, anemic economic expansions, and rising unemployment.
For the past five decades, stagflation concerns have surfaced intermittently, particularly over the past few years, but never appeared.
Is it different this time?
Financial markets, economists, and public policymakers have found it challenging to dismiss worries that the United States could be diagnosed with a case of stagflation.
While recent reports indicate that inflation is proving to be stickier than anticipated, the numbers show intact growth prospects and a robust labor market.
Still, looking ahead, a chorus of economic observers and market participants is beginning to fear the worst.
The index plummeted by more than 700 points, driven by expiring options and disappointing data.
Investors digested the S&P Global Services and Manufacturing Purchasing Managers’ Indexes—monthly surveys depicting the sectors’ prevailing economic directions—highlighting a sharp slowdown in business growth and higher input and selling prices.
That said, it was a tale of two reports for the service and manufacturing sectors, says Chris Williamson, chief business economist at S&P Global Market Intelligence.
“The picture was different in manufacturing, where U.S. manufacturers reported accelerating growth in February—notching up the largest monthly rise in output for nearly a year to contrast markedly with falling production recorded in the eurozone, Japan, and United Kingdom.”
Price pressures were the constant factors in the PMIs.
U.S. manufacturers registered the highest selling price inflation in two years, and input costs surged at the fastest pace since Noveber 2022.
Likewise, companies in the services industry observed strengthening inflationary developments.
Consumers’ outlook exacerbated the market selloff.
The February University of Michigan’s Consumer Sentiment Index revealed that the one-year inflation outlook rose to a one-year high of 4.3 percent.
The five-year forecast surged to 3.5 percent, the highest since 1995.
Sticky inflation, recent jumps in prices for household staples, and tariffs caused the average 12-month inflation outlook to surge from 5.2 percent to 6 percent, the Conference Board noted.
The main event before the end of the month is the U.S. central bank’s preferred personal consumption expenditure (PCE) price index.
However, while traders typically overreact to a single reading, markets should wait for more economic reports before reaching conclusions, says Larry Tentarelli, chief technical strategist for Blue Chip Daily Trend Report.
“We do not think that investors should overreact to one set of data points, especially with the S&P 500 just coming off of new highs this week,” Tentarelli said in a note emailed to The Epoch Times.
“If we see a series of softer than forecast economic data points, that would raise more of a red flag.”
At the same time, the hotter-than-expected January consumer price index (CPI) and climbing manufacturing prices “suggests stagflation risks are more real than many investors anticipated,” according to Tom Essaye, founder and president of Sevens Research Report.
Reading the Economic Tea Leaves
St. Louis Fed President Alberto Musalem recently highlighted the dual risks of rising inflation forecasts and weakening employment amid higher prices.“The risk that inflation expectations could become unanchored is higher than it would be if the economy was operating with slack and if consumers and businesses had not recently experienced a period of high inflation.”
Though Musalem expects inflation to return to the central bank’s 2 percent target, he noted that recent market and survey measurements should be examined.
The regional central bank chief thinks that if inflation progress stagnates, “a more restrictive path of monetary policy relative to the baseline path might be appropriate.”
Federal Reserve Chair Jerome Powell recently stated that there is no hurry to lower interest rates and that policy action will not be taken until officials witness declining inflation.
The Fed has paused its easing cycle, which started this past fall. The benchmark federal funds rate is now between 4.25 percent and 4.5 percent. According to the CME FedWatch Tool, investors are penciling in the next quarter-point rate cut in September.
Core inflation could inch closer to the Fed’s 2 percent goal, but this achievement “will likely prove short-lived,” says Paul Ashworth, chief U.S. economist at Capital Economics.
“Assuming that [President Donald] Trump introduces tariffs and immigration curbs via executive action by the middle of next year, we would expect GDP growth to run close to 1.5 percent at an annualized pace over the following 12 months, with inflation temporarily rebounding to around 3 percent,” Ashworth said.
Recent trends suggest that inflation is moving away from the Fed’s target.
The uptick over the past few months has been fueled by accelerating post-election economic momentum, easy fiscal policy, and high stock and home prices powering consumer spending, Apollo said.
Looking ahead, future increases in inflation could be driven, in part, by rocketing artificial intelligence spending, slowing apartment deliveries, and tariffs.
Should above-trend inflation persist, there are “worries that the Fed’s 2 percent inflation target will be abandoned when Powell steps down as Fed Chair in early 2026,” says Torsten Slok, Apollo’s chief economist.
The Federal Reserve is undergoing its review of monetary policy strategies and communications tools.
While this assessment will not concentrate on adjusting its 2 percent inflation targeting, Powell has reiterated that the central bank should not change the number.
While ITR Economics researchers stopped short of prognosticating stagflation, the group stated that “the trend of broader inflation will persist this decade,” especially as tariffs take effect.
Not everyone is convinced that the U.S. economy could relive the 1970s.
Sunil Kansal, head of UK-based Shasat Consulting, thinks long-term stagflation risks are muted because of the Federal Reserve’s restrictive monetary policy stance over the past three years.
The institution’s rate hikes, Kansal says, have been crucial in bringing down inflation without threatening economic growth.
“Although inflation remains a challenge, the combination of sound fiscal management and aggressive monetary policy is keeping the long-term risk of stagflation in check,” Kansal told The Epoch Times.
Trump and his administration will also likely employ policies in an attempt to limit any upside inflation risks, he added.
In an interview with Fox News host Sean Hannity, Trump acknowledged that “inflation is back.”
“These people have run the country. They spent money like nobody has ever spent. They were given $9 trillion to throw out the window—$9 trillion,” Trump said in the Feb. 18 interview.
As for broader economic growth expectations, Wall Street economists still anticipate GDP growth above 2 percent.
“I think the tailwinds are probably going to trump the tariffs,” said Jan Hatzius, chief economist and head of Goldman Sachs Research.
“We’re still looking for about 2.5 percent growth in the US. We still think that core PCE inflation is going to come down to something like 2.5 percent by the end of the year.”
