Is stagflation making a comeback?

Russell Price, Chief Economist – Ameriprise Financial 

June 16, 2025

Investors are likely to hear the term “stagflation” – the condition of stagnant economic growth amid high inflation – more frequently in the months ahead. Why? Here’s a look at the prospects for stagflation and potential consequences.  

The economic outlook has become more clouded in the last few months, at least for the intermediate term. This is due primarily to the Trump administration’s implementation of tariffs and proposal for more tariffs.  

Tariffs, a type of tax paid to the federal government on imported goods, typically lead to higher prices, or inflation. Higher prices reduce consumer purchasing power, sometimes resulting in slower economic growth. Under the right circumstances, this combination is often referred to as “stagflation.”  

Stagflation can be a particularly troublesome economic situation  

The term stagflation can be unsettling, given that it’s most often used in reference to the 1970s. During that decade, the economy suffered nine quarters of contraction, the unemployment rate stretched to 9.0% in May 1977¹ and year-over-year inflation rates reached +12.3% in December of 1974.² No doubt, those were tough economic times. 

A big difference between now and the 1970s 

Even if growth and inflation were to meet the definition of stagflation over the intermediate term, we do not see conditions as deteriorating as those seen in the 1970s.  

The tariff situation remains dynamic at the time of this writing, but we believe the “most likely path” forward is one of bumpy and slower economic growth over the next few quarters.   

We also believe inflation will rise, possibly reaching close to 4.0% late in the year, depending on the tariff situation, but price pressures should begin to moderate once again as we move into 2026.  

Though slower economic growth and higher inflation are less than optimal, these numbers are a far cry from what we experienced in the 1970s.  

Can Federal Reserve policy help? 

One of the most daunting aspects of stagflation is the dilemma it presents for Federal Reserve policy makers. Usually, if economic growth is too slow, Fed officials can lower interest rates to stimulate activity. Conversely, if inflation is too high, they can raise interest rates to slow demand and ease price pressures.  

When both slow growth and high inflation are present, officials are left to decide which factor is more problematic. Interest rate policies are not designed to address both problems at the same time. 

Lower interest rates could make inflation worse while higher rates could slow economic growth too much, resulting in a higher unemployment rate. This predicament can make escaping a period of stagflation particularly difficult.   

Currently, financial markets see Fed officials as likely to give more consideration to the issue of growth. After cutting their overnight lending rate by a full percentage point in the second half of 2024, the Fed has kept interest rates steady so far this year. Fed fund futures, as traded on the Chicago Mercantile Exchange (CME), currently see the Fed as cutting their lending rate by a quarter-point three times this year, starting in September. 

Such cuts could result in lower borrowing costs in some segments of the economy, but the most important rates for consumers – mortgage rates – would be unlikely to see much benefit as they are more closely correlated with the yield on the 10-year Treasury security.   

Bottom line 

We believe that over the next several quarters, economic growth is likely to slow amid higher prices. Inflation should begin to see upward pressure from higher import prices in May, coming off a four-year low of 2.3% in April. But in our view, it would be a mistake to consider such conditions as comparable to the experience of the 1970s. We don’t see a broad and sustained contraction of economic activity as likely. 

Connect with your Ameriprise Financial advisor 

For questions about your personalized investment strategy or your portfolio amidst economic uncertainty, reach out to an Ameriprise financial advisor.