The Risk of Stagflation in a Slowing US Economy

Stagflation is one of the most feared economic crises that a nation can encounter. It occurs when there is no growth in the economy yet inflation continues, causing the average person to suffer and leaving policy makers helpless. Most Americans have not lived through a stagflation experience, with the last true case of U.S. stagflation occurring in the 1970s, as oil shocks drove up the cost of energy while the overall economy remained at a standstill. Today, tariff pressures and a cooling labor market, as well as quickly rising energy prices linked to the war in Iran have helped bring the discussion of stagflation back. 

This concern is based on numbers surrounding GDP growth and inflation. GDP growth in the fourth quarter of 2025 was adjusted to just 0.7% annualized. This is a large decline from the 4.4% rate one quarter earlier. Core PCE, the preferred inflation indicator by the Federal Reserve, was 3.1%, quite a bit higher than the Fed’s recommended 2% inflation rate. This slow growth along with high inflation points towards potential stagflation.

Policy Overview 

A few forces are driving the US economy towards stagflation. Tariffs under the Trump administration have increased the prices of imported goods. The effective tariff rate rose from 2.1% to an estimated 11.7% in January 2026. The majority of those costs fell on to consumers. Unemployment also rose from 4.1% to 4.4% throughout 2025, due to hiring slowing and restrictions on immigration also limited labor supply. The current war in Iran then provided a jolt to energy markets; data released even before the conflict revealed the economy slowing down, with some economists warning the oil shock could push the United States more toward recession. 

The Federal Reserve must make some decisions. At its March 2026 meeting, the Fed held rates steady at 3.50% to 3.75%. The Stanford Institute for Economic Policy Research has described this as the defining challenge of the moment, with the Fed’s goals of stable prices and strong employment directly going against each other. 

Future Implications 

Core inflation is likely going to stay above 3% for most of 2026, driven by tariff costs and rising housing prices. GDP growth is expected to remain below 2% as well. This is too slow to raise the standard of living significantly or meaningfully reduce unemployment. For the average American household that points to a longer period of tight finances. The biggest question for the United States economy in 2026, amid much international tension, is whether the Federal Reserve can successfully navigate this balancing act to successfully combat stagflation.