Stagflation may be returning to the U.S. for the first time in nearly 50 years. Recent economic data points to a weakening labor market and persistent inflation. President Donald Trump’s new tariffs are likely to make the situation worse.

This creates a challenging environment for consumers. Unemployment could rise, wage growth may slow, and the cost of living could keep climbing. Borrowing for a mortgage or car loan would also become more expensive.

What Is Stagflation?

Stagflation occurs when economic growth slows or contracts, unemployment rises, and inflation remains high. The term became widely recognized in the 1970s, and it presents a challenge for policymakers—especially central banks—because conventional economic tools are less effective.

Typically, inflation results from demand outpacing supply, and the usual response is to raise interest rates to slow the economy. However, in a stagflation scenario, higher interest rates may help curb inflation but can also deepen a recession.

The exact causes of stagflation remain uncertain. In the 1970s, an oil embargo by OPEC, in response to Western support for Israel during the Yom Kippur War, caused a price shock that rippled through the economy. The government at the time failed to address the crisis effectively.

Current Warning Signs

Two key economic trends point to stagflation risks: slowing job growth and stubborn inflation. Here’s where we are now:

• January inflation data showed higher-than-expected price increases.
• Employers added far fewer jobs in February than in January, while unemployment claims rose above forecasts.
• The staffing index in the ISM manufacturing survey indicated a sharp increase in prices paid.
• The Atlanta Fed is now projecting a 2.8% contraction in the U.S. economy for this quarter—an outlier among most forecasts but a potential red flag.

The upcoming payroll report for February, set for release on March 7, could provide further confirmation of a weakening labor market. Some economists expect another major disappointment.

What Stagflation Means for Investors

Historically, stagflation has been bad news for both stocks and bonds. During the 1970s, the S&P 500 dropped 48% from January 1973 to December 1974 and took until the 1980s to fully recover. Bonds also lost value as inflation eroded their fixed payments.

To hedge against stagflation, investors often turn to inflation-protected securities like Treasury Inflation-Protected Securities (TIPS) and commodity-based investments, such as natural resource companies.

How Can Stagflation Be Addressed?

There is no clear consensus on how stagflation ends or which government policies work best. Many explanations reflect ideological biases.

While economic growth rebounded in the late 1970s, inflation remained high until the Federal Reserve’s so-called Volcker shock from 1979 to 1981. By gradually raising interest rates to as high as 19.1% in June 1981, the Fed eventually reduced inflation, but at the cost of pushing unemployment to 10.8%.

One reason a repeat of 1970s stagflation is less likely today: The U.S. no longer has a strong labor movement. In the 1970s, unions could demand wage increases to match inflation, fueling a wage-price spiral. With weaker unions today, that dynamic is less pronounced, reducing the risk.

On the other hand, Main Street will bear the brunt. We’re on Wall Street here. Our investments do the work and pay our bills.