Stagnant Growth and Rising Prices Spur Stagflation Concerns

2025-03-31 economy

New York, Sunday, 30 March 2025.
Stagflation fears grow as the U.S. faces stagnant economic growth coupled with rising inflation, reminiscent of the 1970s economic troubles.

Economic Indicators Point to Stagflation

Recent economic data paints a concerning picture of the U.S. economy. According to the Federal Reserve Bank of Atlanta’s real-time estimates, economic activity is contracting at a 0.5% rate in Q1 2025 [1]. Meanwhile, the Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures (PCE) Price Index, rose to 2.8% year-over-year in February 2025, exceeding forecasts of 2.7% [2]. The core PCE has accelerated to a 3.6% annualized pace over the last three months, reaching its highest level since March 2024 [7].

Consumer Sentiment and Market Response

Consumer confidence has taken a significant hit, with the University of Michigan’s sentiment survey showing troubling trends. The March 2025 survey revealed that two-thirds of Americans now expect unemployment to rise over the next year, marking the highest level of pessimism since 2009. Additionally, consumers anticipate inflation to surge to 5% over the next year, up substantially from 4.3% in February [1]. These concerns have reverberated through financial markets, with the S&P 500 declining 9% from its February 19 peak [1]. Adding to market anxiety, gold prices have surged above $3,000 per ounce [3], reflecting growing investor unease about economic stability.

Policy Challenges and Trade Tensions

The Federal Reserve faces a complex policy dilemma as it attempts to balance growth and inflation concerns. Chicago Fed President Austan Goolsbee highlighted this challenge on March 25, 2025, stating that ‘there is nothing more uncomfortable than a stagflationary environment, where both sides of the mandate start going wrong’ [2]. The situation could be further complicated by new trade policies, as the administration prepares to implement a 25% levy on steel and aluminum imports starting April 2, 2025 [2]. According to ING chief international economist James Knightley, these tariffs threaten to keep inflation elevated and may constrain the Federal Reserve’s ability to implement interest rate cuts [7].

Future Outlook and Market Implications

Market expectations for monetary policy have shifted in response to these developments. Traders are now pricing in approximately 73 basis points of interest rate cuts by the Federal Reserve for the remainder of 2025 [5]. This adjustment reflects growing concerns about the economy’s trajectory, with Treasury yields experiencing their largest daily drop in over a month on March 28, 2025. The benchmark 10-year Treasury yield has fallen to 4.255%, while two-year yields have decreased to 3.908%, reaching their lowest level in more than two weeks [5].

Sources

inflation stagflation