There May be Trouble Ahead
Stagflation fears have resurfaced as Trump's aggressive tariff rhetoric coincides with sluggish economic growth and persistent inflation. Recent weeks have revealed troubling indicators, with the Conference Board's consumer confidence index unexpectedly falling to an eight-month low, coupled with weakening housing and services data.
Recent declines in the S&P and Dow Jones reflect growing investor anxiety, while US Treasuries yesterday rallied to their lowest yields this year. Increased demand for gold—traditionally valued during stagflationary periods—further signals market apprehension.
Mark Zandi of Moody's Analytics warns markets are underestimating stagflation risks, stating: "Tariffs and deportations are a recipe for inflation and hurt growth; both are negative supply shocks." He draws parallels to similar shocks that fuelled the 1970s stagflation crisis.
A Bank of America survey shows investor expectations for stagflation reaching a seven-month high, citing policies likely to impede growth, deportation of undocumented workers, government job cuts, and threatened tariff increases as contributing factors.
Nobel laureate Joseph Stiglitz cautions that the Fed is "clearly worried" about inflationary pressures from Trump's tariffs, potentially necessitating interest rate hikes. He forecasts a possible stagflation scenario with rising prices alongside weak growth, whilst criticising Treasury Secretary Bessent's approach to lowering bond yields, suggesting Trump's policies may only achieve this by damaging the US economy.
This economic turbulence occurs against a backdrop of widening inequality. While inflation financially strains most Americans, the wealthiest 10% continue luxury spending, supported by gains in stocks and property. According to Moody's Analytics, these affluent consumers now account for a record 49.7% of all spending, compared to 36% three decades ago.
The spending divide is stark: between September 2023-2024, high earners increased expenditure by 12% while working and middle-class households reduced spending. Over four years, the bottom 80% spent merely 25% more (just above the 21% inflation rate), whilst the top 10% increased spending by 58%.
This two-tier economy significantly influenced the recent election outcome. Trump now faces the formidable challenge of controlling inflation without triggering recession—a task complicated by concerning trends across key economic indicators and the potentially destabilising impact of his proposed tariffs.
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