Emerging stagflation warning panels in the American economy

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The US stock market has provided exceptional performance in the past year. Compared to other developed countries, the American economy has exceeded its peers, driven by relatively solid profits from companies, high public spending and an increase in productivity. However, the financial markets are starting to wonder if this era of American exceptionalism is coming to an end. A disturbing mixture of slowdown in economic growth and the increase in consumer prices, also known as stagflation, threatens to stop the long -standing outperformance of the market. It is a scenario that decision -makers and investors are impatient to avoid.

What is stagflation and why it is important in 2025

Stagflation is relatively rare because inflation and economic stagnation generally do not occur at the same time. The drop in prices generally accompanies economic slowdowns, as lower demand exerts downward pressure on inflation. In response, political decision -makers often turn to stimulating tax and monetary measures such as increasing public spending or lower interest rates to help revive growth.

During stagflation periods, the slowdown in economic growth and the increase in consumer prices occur simultaneously. This is generally based on offer shocks, restrictive trade policies or poor government decisions that increase prices while injuring economic activity. The latest major episode of stagflation in the United States occurred in the 1970s when oil shocks and fake politics have triggered reverential inflation and a weak economy.

A return to a scenario of style stagflation from the 1970s would be disastrous for investors, but recent economic indicators suggest that a similar model could take place. While inflation was held compared to its peaks of 2022, it remains obstinately above the target of 2% of federal reserves. At the same time, consumers' feeling has declined sharply, commercial activity slows down while businesses are waiting for the clarity of commercial policy and the main indicators of the labor market are starting to weaken signs of a cooling economy.

How prices fuel stagflation problems

Prices are a major contributor to inflation prospects. According to the Federal Reserve Bank of New Yorks Survey of Consumer Woundations, in February 2025, American consumers expect inflation to reach 3.1% over the next year, the highest level recorded since May 2024. In response to worsening prospects, investors in cash inflation protected the titles two months ago.

Advice price of the inflation rate for the number of 2 years

Bloomberg Finance LP; Garth friesen

The feelings of consumer feelings of the University of Michigan paints an even more worrying image. The latest report has shown a sharp increase in inflation expectations, the one -year prospects of 4.9% since November 2022 and five -year prospects of 3.9%, marking the highest monthly increase since 1993. Unlike the federal survey, the Michigan index emphasizes immediate consumers of inflation when they are released to personal and current economic conditions more volatile. The most likely driver behind this change of feeling is uncertainty surrounding the prices.

New prices, including a 25% levy on steel and aluminum imports, as well as a wider reciprocal tariff policy should be revealed on April 2. They should increase costs for American companies, many of which will pass these costs from consumers. Although the administration hopes that these commercial measures will stimulate domestic production, the short -term reality is that higher input costs will likely lead to higher prices.

Consumer feeling decreases as growth prospects decrease

Since inflation remains high, economic growth shows signs of slowing down. The feelings of consumer feelings of the University of Michigans dropped 11% last month, going to its lowest level since 2022.

Consumers are increasingly concerned about their financial prospects. Feeling is a key indicator of the future behavior of expenses; When confidence decreases, households often increase discretionary purchases, which can slow down global economic activity. Companies already adjust their expectations in response. For example, Delta Air Lines recently lowered its profits from the first quarter of 2025, citing lower consumers and commercial demand.

Similarly, initially optimistic about pro-enterprise policies following the national elections in November, small businesses are now expressing concerns about future growth as part of the cost increase and the continuous uncertainty of policies. After a brief period of outperformance compared to the actions with large capitalization, the shares with small capitalization is struggling again. As of March 27, 2025, the FNB Ishares Russell 2000 was down 7.19% the year at the start, considerably subperform the S&P 500 ETF SPDR, which decreased by 2.95% over the same period.

Labor market risks and companies' prudence

To worsen things, there are warning signs that employment growth can lose steam. The index of the employment trends of conference councils, which follows hiring trends, suggests that the momentum on the labor market is in decline.

“The ETI fell in February at its lowest level since October,” Mitchell Barnes of Conference Board said in a press release. “The growing uncertainty of policies is beginning to weigh on the feeling of businesses and consumers, with more substantial impacts of federal dismissals and expected funding disturbances in the coming months,” noted Barnes in the press release.

While federal layoffs linked to DOGE are starting to appear in data and some private companies react to the new pricing regime with potential employment features, consumption expenditure could be significant, further strengthening the stagflationist cycle.

The dilemma of the federal reserve?

The stagflation prospect puts the federal reserve in a particularly difficult position. If inflation continues to increase, it is possible that the Fed is forced to tighten monetary policy in this case, the Central Bank risks allowing the economic slowdown by increasing borrowing costs. On the other hand, if policy is dried up too early to support growth, inflation could accelerate more.

The Fed has reported its continuous commitment to control inflation and inflation under control, but the increase in prices has complicated its approach. At its last meeting, which concluded on March 19, Fed officials recognized increasing economic uncertainty, encouraging them to increase their inflation forecasts while reducing their growth prospects.

There is nothing more uncomfortable than a stagflationist environment, where the two sides of the mandate are starting to go wrong, said Chicago Fed president Austan Goolsbee on March 25 on CNBC. Higher prices increase prices and reduce production which is a stagflationist impulse, he added.

How investors can prepare for stagflation

The financial markets responded to increasing uncertainty with increased volatility. The S&P 500, which approached record heights, fell by 10% of its peak while investors weigh the prospects for growth weakening an increased uncertainty of the policy. The bond market also shows signs of tension. Despite the expectations of slower growth, bond yields have increased while investors require higher yields to compensate for the increase in inflation expectations.

For investors, the threat of stagflation has a difficult environment. Traditional actions can combat stagnant growth, while sectors protected by inflation such as basic products and infrastructure could provide some resilience. Historically, gold and other hard workers have performed well during stagflationary periods. A recent increase in gold medals greater than $ 3,000 per ounce probably reflects increasing concerns about this risk.

In the meantime: can the United States avoid stagflation?

Fortunately, stagflation is not inevitable. Avoiding this will require a balanced approach to the Trump administration, which deals with inflation without stifling economic growth. Offering greater clarity on commercial policy and the implementation of targeted budgetary adjustments that preserve consumer demand could help mitigate some of the key risks.

It is also possible that the reciprocal tariff strategy, which corresponds to the American prices on the samples imposed by other countries, can finally lead to a drop in tasks. For example, Bloomberg said that the European Commission writes a gap for a potential agreement with the United States, which would include reducing EU tariffs, encouragement of mutual investments and the relaxation of certain regulations and standards. Such concessions are exactly what Trump administration aims and could help counter some of the stagflationary pressures currently at stake.

The effects of federal spending reductions, reworked trade policies and weaken consumers' feelings will take the time to make their way in the economy. Although markets can be excessive reacting to the threat of stagflation, the risk remains that decision -makers can find themselves trapped, faced with the rise in prices in the middle of a slowed economy. In such a scenario, shares and obligations may have more drawbacks. Stagflation is a losing situation and the financial markets know it.

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