Top strategists warn about stagflation risk as China trade tensions remain

While not yet sounding an alarm, top strategists at BlackRock are starting to worry about the possibility of U.S. stagflation — high inflation combined with high unemployment and stagnant demand.

What they're saying: Mike Pyle, chief investment strategist for the BlackRock Investment Institute, sees inflation as set to pick up "thanks to more tariffs and faster wage growth in the face of a tight labor market," he says in a note to clients.

• "A mix of lower growth and higher inflation complicates the Fed’s effort to achieve maximum employment and stable prices."

Be smart: Despite a recent armistice between the U.S. and China on the trade war, BII strategists believe the tensions are underpinned by "structural" issues, reducing the likelihood of a meaningful deal and keeping the trade war brewing for some time.

• "U.S. growth could fall materially below trend in coming quarters," Pyle says. And with China slowing and Europe struggling, the U.S. is "unlikely to get much help from the rest of the world."

The bottom line: "Trade tensions pose the risk of slowing growth and rising inflation — a potential threat to stock and bond markets alike."

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