Is the U.S. headed for ‘stagflation?’

Concerns about the effects of tariffs and the prospect of a slowing U.S. economy have once again brought the prospect of “stagflation” to the table.

The last time that experts warned about potential stagflation, defined as rising inflation accompanied by sluggish growth and rising unemployment, was in early 2022, as the U.S. was contending with the aftereffects of the pandemic and Russia’s recent invasion of Ukraine. However, stagflation never materialized and economic growth remained strong during the next few years.

Today, stagflation is one of many possible outcomes of the current policy changes, noted Steve Wyett, chief investment strategist at BOK Financial®. “We are not there yet, but recent data is pointing in that direction.”

Lack of clarity defining the outlook for investors and businesses
However, even if the U.S. doesn’t enter a period of stagflation, consumers and businesses are still contending with a great deal of uncertainty—and likely some discomfort—at least in the short term, Wyett continued.

“The word of the moment is clarity—or the lack, thereof,” he said.

This lack of clarity set stock markets tumbling on March 11 after President Trump announced that U.S. tariffs on Canadian steel and aluminum would double to 50%, a move that he later went back on. Meanwhile, the percentage of households that expect their financial situation to be worse a year from now increased to the highest level since November 2023, according to a survey from the Federal Bank of New York. Small business owner confidence also continues to fall.

What’s behind all this uncertainty
The constantly changing news around tariffs seems to be the main factor driving this uncertainty, especially as the full picture of U.S. tariffs and retaliatory tariffs from other countries is unclear, Wyett said.

“Nobody would say that tariffs are additive to growth,” he continued. “Whether they're inflationary or not is a bit of a question mark, but they do increase costs for consumers.”

Another question mark is the strength of the job market, including how laying off tens of thousands of federal employees may impact the unemployment system and unemployment numbers. “The employment market's still pretty tight, so there may very well be open jobs for those people at a higher rate than what the market's anticipating,” Wyett suggested.

And then there’s the uncertainty around future Federal Reserve rate cuts to consider. “Questions about the potential for higher inflation from tariffs, along with slower growth all put the Fed in a tough position,” Wyett explained. “Slower growth would argue for the Fed to be easing rates, but higher inflation means that the Fed should be raising rates.”

How to deal with this economic uncertainty
Although not getting ruffled by news headlines and stock market declines is easier said than done, Wyett said the key is not panicking and remaining focused on the long-term.

For investors, the current situation is a reminder why risk management is important. For instance, investors who leaned heavily on large-cap growth stocks because that’s where high returns were previously are likely feeling a greater negative impact now, whereas investors with more balanced portfolios are probably about even for the year, he explained.

Business owners, meanwhile, should be looking at their cost structure and, if their businesses have an international component, they may want to ask their financial services providers about currency hedging. However, when making any major decision, it’s important to remember that “tariffs aren’t permanent. It’s important to keep an eye where best to put capital for longer-term objectives,” Wyett said.

Additionally, deregulation and its effects remain another question mark for businesses in fields like fintech. “It’s going to take a while for deregulation to be a benefit to companies, so earnings might go down a little bit. That's why there’s repricing,” he explained.

Multiple paths ahead
As in any period of uncertainty, there are multiple ways all of these factors—from tariffs to unemployment to Fed rate cuts—could play out. Moreover, many of these scenarios are intertwined with each other. For instance, if tariffs increase inflation, that could cause the Fed to rethink cutting rates this year, which in turn would impact businesses and consumers with debt and even the federal government’s own interest costs.

All this said, Wyett overall remains optimistic for the future. “There’s a path forward where all of this could unwind positively in the long run,” he said. “There's obviously some pain that's going to have to take place, but in the longer term, this could really transition into a period where we have a more sustainable growth path.”