Stagflation fears are back
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Illustration: Lindsey Bailey/Axios
America is showing new signs of stagflation — inflation running hotter, the job market suffering new weakness, and economists warning both are at risk of getting worse in the months ahead.
Why it matters: The word "stagflation" revives miserable memories of the 1970s, when Americans faced a dreadful combination of higher prices and few job opportunities.
The big picture: This was the week mainstream economists were vindicated.
- Predictions of weaker growth and more persistent inflation — the "stag" and the "flation" — looked farfetched, until now.
What they're saying: "The bottom line is that the risk of stagflation has risen meaningfully," Olu Sonola, an economist at Fitch Ratings, wrote in a client note.
- "Inflation is drifting further from target, private sector economic growth has slowed materially, and the labor market has just sounded a warning bell."
Catch up quick: Trump fired the Bureau of Labor Statistics' top official on Friday, hours after the agency reported weaker-than-expected jobs growth.
- He claimed, without evidence, that the numbers were politically manipulated.
- In an interview with Axios, top White House economist Stephen Miran agreed that the BLS needed new leadership to address massive data revisions, but did not claim the numbers were manipulated.
By the numbers: The economy added just 73,000 jobs last month, while historic downward revisions suggested the labor market added almost no jobs at all the previous two months.
What's going on: That's the "stag." Now consider the other indicators released in the past week.
💰 GDP: The economy expanded at a 3% annualized rate in the second quarter, boosted by the reversal of unprecedented importing activity in the first quarter. Dig into the report and the growth snapshot looks worse.
- A measure of underlying domestic demand — which strips out swings in trade, inventory and government spending — rose at only a 1.2% rate in the second quarter, the weakest since the end of 2022.
🛒 Inflation: The Fed's go-to inflation measure rose in the final two months of the second quarter, despite moderating underlying growth.
- The Personal Consumption Expenditures price index rose by 2.6% in the 12 months through June, the second consecutive increase.
- The gauge that excludes food and energy rose by 2.8%, ticking up slightly from May.
Between the lines: The collection of data — especially the weak jobs report — strengthens the case for the Federal Reserve to cut interest rates in September.
- But inflation concerns will still be top of mind for the Fed. There are early signs that Trump's tariffs are pushing prices higher. No one knows whether those increases will be persistent.
For the record: "We've been here before when there was large scale doom-mongering ... about the Tax Cuts and Jobs Act and about the President's tariffs on China in the first term," Miran says.
- All of the "doom-mongering" turned out to be wrong, Miran said.
- He added that there was good reason to believe the economy would get stronger from here, citing Trump's tax and spending bill, as well as a spate of recent trade deals.
The bottom line: If Trump gets the rate cut he has been yearning for, it might be for a reason he likely hates — a slowing economy.
- If he doesn't, it will be because economic policymakers still see inflation as too big of a risk.
