Travis N. from Hilo, HI asks: Hi Mitch! A recurring theme—and actually, a recurring word—that I keep hearing in the news is ‘stagflation’. I’m familiar with the term and what is meant by it. But I’m wondering if it is actually a risk for 2025, and what you think about it.
Mitch’s Response:
For readers who are not familiar, stagflation is an economic environment characterized by high inflation paired with stagnant or declining economic growth. I think it’s fair to have stagflation concerns on your radar at the moment—if tariffs ratchet higher globally and we get to a place where trade barriers increase considerably, I could see an environment where inflation pushes back above 3% while growth slows to a trickle. Markets would likely not react well to that scenario.1
But I’d caution against seeing this outcome as a foregone conclusion.
Tariffs, Uncertainty, and Market Volatility—What You Need to Know
The back-and-forth on trade policy has already shaken investor confidence, and with Canada and Mexico at the center of the debate, the stakes are even higher. Markets don’t react well to unpredictability—especially when growth is on the line.
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Just this week, for instance, we saw a ‘better-than-expected’ outcome on tariffs. Markets were uneasy about a broad set of proposed tariffs set to go into place on April 2, but they’ve been scaled back considerably. Sector-specific tariffs on industries such as automobiles, semiconductors, and pharmaceuticals are no longer expected to be announced on that date, and the focus has instead shifted towards implementing reciprocal tariffs targeting countries with significant trade surpluses with the U.S., including China, the European Union, and Mexico.
I do not think these reciprocal tariffs will be particularly constructive to growth and inflation, but for markets, what may matter more is that the tariffs are not as broad and punitive as originally anticipated. The U.S. economy can absorb some level of tariffs, in my view, but the uncertainty is what nags at markets.
Back to your stagflation question, I think it’s just a wait-and-see for investors at this stage. If we could predict what tariff policy will ultimately look like this year, I think I’d have a better answer. But no one really knows where the Trump administration will land on trade.
For its part, the U.S. economy appears to be hanging onto a growth trajectory, and inflationary pressures remain in check—for now. As of February 2025, the Personal Consumption Expenditures (PCE) price index, a key measure of inflation, showed a 2.8% year-over-year increase. The labor market has been resilient, with the unemployment rate hanging around 4% and hiring showing steady gains. Consumer spending is a fundamental to watch in the coming months, however, as some households are adjusting their expenditures in response to economic uncertainty—as evidenced by January data.
Taken together, the overall economic data does not give confirmation of stagflation. As worries grow, however, I think another, somewhat contrarian message for investors to consider is the expanding possibility of a positive surprise. If consensus shifts dramatically towards the expectation of stagflation, and we get the opposite, that could be a big mover for stocks, in my view.
Tariff uncertainty is keeping investors guessing, with shifting policies affecting key industries and global trade partners. While the U.S. economy is holding steady, inflation risks and market volatility remain top concerns.
Our free March 2025 Zacks Market Strategy Report3 unpacks the latest developments, what they mean for your investments, and why the biggest market move might still be ahead. Download your copy now for insights into:
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Disclosure