Stagflation is an economic perfect storm that combines inflation, supply shortages and slower growth, along with a high unemployment rate. This term was used to describe the economic hardships of the 1970s. The OPEC oil embargo caused oil prices to quadruple in the 1970s, sparking high inflation and elevated unemployment rates.
Though an oil embargo was one of the main catalysts that led to stagflation in the 1970s, there is some debate about whether President Donald Trump’s tariff policies can cause economic stagflation. Inflation has hovered a little below 3% in recent readings, although that’s still far off from the Federal Reserve’s 2% target.
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The concern with tariffs is that they can simultaneously increase prices while leading to higher unemployment. While some investors may believe Trump’s tariffs are leading the U.S. toward stagflation, others say those fears are overblown. Here are details on both perspectives:
— What causes stagflation?
— Is the economy headed toward stagflation?
— Wild cards that can influence stagflation.
— How can investors protect against stagflation?
— Be greedy when others are fearful.
What Causes Stagflation?
Stagflation usually starts when commodity prices go up. Food and oil are two widely used commodities that can elevate costs for businesses and consumers. Rising oil prices, in particular, increase costs across the board because oil is associated with the transporting of products. Companies pay extra money for shipping and pass those costs on to consumers.
Higher costs on consumers can make them more cautious of their spending and result in companies facing slower demand and lower profit margins. Some businesses may have to lay off workers to remain afloat, causing higher unemployment and further fueling stagflation in the process.
Stephen Callahan, trading behavior analyst at Firstrade, believes that tariffs can have long-term benefits like job growth. However, he also explains how tariffs can lead to higher costs while hurting businesses and consumers in the short run.
“President Trump campaigned on a range of policies he pledged to implement during his administration. One of his primary goals is to impose tariffs and renegotiate trade agreements,” Callahan says. “Investors will be closely watching the potential immediate effects, including higher costs for U.S. companies and consumers — especially if other countries retaliate with tariffs of their own. Such measures could severely disrupt global supply chains, strain international trade relations and significantly reduce exports for American businesses.”
“Depending on the scope of the tariffs, the U.S. economy could experience rising prices due to supply chain shifts and labor disruptions caused by increased costs,” Callahan continued. “Soaring inflation and unemployment would raise concerns among investors and could signal a shift toward stagflation.”
It’s also tricky to get out of stagflation. Reducing interest rates can stimulate more economic demand, but those Fed rate cuts will also boost inflation. Raising interest rates can stem inflation, but businesses will feel less inclined to take out loans, and that will boost unemployment. Higher rates also make it more difficult for consumers to keep up with credit card debt and other financial obligations.
Is the Economy Headed Toward Stagflation?
This question also came up in 2022 when inflation reached 40-year highs. The Fed then proceeded to initiate significant interest rate hikes, creating the fear of stagflation. Rates have been slowly declining while inflation has remained below 3%, but Trump’s tariffs have more people concerned.
Jason DeLorenzo, principal and owner of Ad Deum Funds, explains some of the obstacles tariffs create, plus how they can lead to stagflation.
“I think Trump’s tariffs are damaging on multiple fronts,” DeLorenzo says. “First is the natural stagflation. Second, foreign countries will reciprocate and the U.S. loses market share in foreign markets. Third, it damages diplomatic relationships with other countries. I think the results from tariffs have the potential to be as bad as it is being made out to be, but also the hardest part of the tariff discussion is the uncertainty around which countries will pay, which goods will be targeted or how much any tariff will be. It seems to change daily, and markets don’t like uncertainty.”
[Read: Recession 2025: What to Watch and How to Prepare]
Wild Cards That Can Influence Stagflation
Inflation has continued to hover above the Fed’s 2% target, but we may see higher readings later in the year as more tariffs are enforced. One wild card is if the Department of Government Efficiency, led by Tesla Inc. (TSLA) CEO Elon Musk, reduces enough government waste to curb the higher inflation that comes from tariffs, but Trump himself is also a wild card.
Trump’s advocates and critics seem to agree on one thing: The president’s tariffs are filled with uncertainty. It’s impossible to predict what the tariff rates will be, which ones will stick and which ones will be withdrawn shortly after their enforcement. More clarity may come on April 2, when Trump is expected to unveil either a set of reciprocal tariffs on U.S. trading partners or an across-the-board levy on foreign imports.
In any case, the president and his allies have sold tariffs as a way to “level the playing field” for the U.S. after years of overpaying.
“Starting a system that is reciprocal can lead to several outcomes,” says Ronnie Gilliken, president and CEO of Capital Choice of the Carolinas in High Point, North Carolina. “One is that the other nation lowers their tariff so they do not pay as much when sending goods here, and another is that companies, to get around the tariff, will start manufacturing in the United States.”
The threat of reciprocal tariffs has already prompted potential changes. For instance, India is now open to cutting tariffs on more than half of U.S. imports. If other countries lower their tariffs, this fanfare can actually result in lower inflation. The push for tariffs as a policy tool may cause short-term economic pain. However, Gilliken says tariffs can provide a big economic boost in the long run.
“Just the threat of tariffs has caused many companies to begin moving their plants back into the United States,” he says. “I fail to see how having massive amounts invested in American manufacturing would lead to low economic growth or higher unemployment. It will be the opposite.”
Advocates view recent policies as a shift from free trade to fair trade. However, it’s still unknown what Trump will do and how other governments will respond to his tariffs.
How Can Investors Protect Against Stagflation?
Stagflation can result in meaningful portfolio losses if investors aren’t prepared. Although stagflation is unlikely to occur in the current economic conditions, it’s good to have a contingency plan in place.
Diversifying your portfolio across stocks, real estate, gold and other assets can minimize your risk during stagflation. Real estate and gold can also help hedge against inflation. As inflation increases, real estate and gold also rise in value because of their limited supply and their value to society. Other commodities also tend to perform well during stagflation, since high unemployment and high inflation can lead to erosion of the value of fiat currencies.
Growth stocks usually don’t fare well during stagflation. These stocks tend to have high valuations and depend on growing economies to achieve high revenue and earnings growth. While consumer goods and utility stocks usually get left behind during bull markets, these same companies can generate steady returns and cash flow during stagflation. Investments that were volatile before stagflation will likely get more volatile and generate losses.
Investors can also consider Treasury inflation-protected securities, or TIPS, to protect themselves against inflation. These investments have variable principals that can go up or down during a term. If inflation increases, the principal will also increase. You will receive the higher amount at maturity if the TIPS principal increases over time. And you’ll still get the original investment amount in the event of deflation.
Be Greedy When Others Are Fearful
Panic in the stock market can feel apocalyptic to people who focus too much on day-to-day price fluctuations. Many investors bailed on the stock market in 2022 when equities dropped amid record-breaking inflation and numerous rate hikes. However, those same equities rebounded in 2023, with many of them reaching all-time highs in 2024.
History doesn’t necessarily repeat, but it often rhymes. We may see that in 2025 as investors rush out of equities, but they may regret hitting the panic button in a few years.
Stagflation can produce many negative headlines about corporations’ earnings reports and how some businesses are struggling to survive. Joseph Camberato, CEO of National Business Capital, encourages investors to zig when the market zags.
“Stay alert for great opportunities. If you find one, take advantage of it because you might not know when the next one will come along,” he says.
During the worst of 2022, Facebook parent Meta Platforms Inc. (META) traded below $100 per share. Just a few years later, it’s trading above $500 per share. Many stocks are available at a discount during stagflation and other economic contractions.
If everyone seems to be bearish on the stock market, it can present an attractive long-term buying opportunity. Investors should be the most fearful when everyone is bullish.
This paradox has played itself out many times in the stock market. Recognizing how it has occurred in economic downturns like the Great Recession and the short-lived pandemic crash can make investors more prepared for opportunities that will emerge during stagflation.
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What Is Stagflation, and Is It a Worry Amid Tariff Turmoil? originally appeared on usnews.com
Update 04/01/25: This story was published at an earlier date and has been updated with new information.
