Is a slow-burn stagflation coming? For those unfamiliar, stagflation combines sluggish economic growth—or even a recession—with rising inflation and high unemployment. Picture this: a recession, job losses, and soaring prices all at once. In this piece, I’ll share my thoughts on why this triple threat might be brewing in today’s economy.
Note: This is my opinion, not investment advice.
Immigration and Housing
We already know that immigration will be the first thing Trump would involve himself directly with; that includes sending massive deportees to their respective economies. While this could reshape the labor market conditions, this also largely impacts the rental costs as well. Along with a newly imposed travel restriction that was just released a few days ago, could this continue to deter investment further? It’s too early to say but the disruption is clear.
Layoffs and Demand
Recent massive layoffs are just a starting point from the Trump and Elon Musk evolutions (as shown in the above image), either from the federal worker or DOGE cut; these are aimed at reducing the budget spending. However, we haven’t seen the full ripple effects of a broader business slowdown yet. According to the Bureau of Labor Statistics, the unemployment rate (U6) rose to 8.0%, up from 7.5%, which suggests softness in the labor market conditions.
Weak consumer sentiment, coupled with higher inflation expectations and current deteriorated demand, leaves companies with tough choices: cut jobs to reduce costs, pass the burden cost to consumers, or adopt “shrinkflation (a.1). And unlike food companies shrinking package sizes, the tech firm relies on precision components, for which shrinkflation may not be an option. People will lose their jobs and have no household income; of course, spending will dry up. They will only spend less and save more (in the image below) or worse, they can’t even support themselves and push out to the street. This is called the “wealth reverse effect.” (a.3) So where would demand come from? Maybe from the rich.
The only problem we are seeing so far is the wealth gap. Rich will be richer and poor will be poorer. All of those jobs that were lost, are main stream from the middle to low-income class that will be faced in front; however, a longer effect, even the elite could feel the pinch as economic growth deflates.
a.1: Shrinkflation is a term used to describe how the business reduces the product size while maintaining the price.
a.2: Buy-in front is presumably preemptive purchasing.
A.3: Wealth reverse effect = erode the wealth effect.
Trade Wars and Inflation
Inflation expectations are now building up in the name of a trade war. Trump’s uncertain trade policy changes could lead to higher inflation expectations and possibly end with higher inflation. Whether Trump chooses to proceed as planned or not; this does not matter if many companies panic and stockpile, or I call this a buy-in front (a.2). This will unexpectedly surge production without matching demand. Either way, this will stain the cash flow, resulting in losses and further layoffs. Hyperinflation is not guaranteed, but the risk is growing.
Central Bank Action
All of these thoughts will only lead to one conclusion, which is massive easing to stimulate economic growth and reduce the nation’s debt deficit. Will policymakers act fast enough to avoid this slow burn—or are we already too late? This will depend on the durability of the consumer. Let’s say that Trump still sticks to his plan of imposing heavy duties on neighboring countries. A timely demand revival might spark recovery—but if the demand stays weak, stagflation becomes a real threat. Inflation will keep coming unless the US has its own production of necessary items in the US.
All of these factors are leading many investors to sell off their underlying assets due to fear of recession or possibly fear of stagflation, resulting in turbulence in the stock market for the past few days. In fact, the JP Morgan report and chief economist at Moody’s Analytics are raising the odds of recession up to almost 50% amid tariff threats. The S&P 500 dropped remarkably.
However, that is not the worst-case scenario yet. We only focus on the US economy; how about their trading partner?
China’s massive quantitative easing has yet to revive its economy meaningfully. The UK and Canada face growth stalls from trade tensions, political shifts, and global uncertainty, with layoffs piling up. Japan, despite tensions with the U.S. over defense spending, has held firm. But if the Bank of Japan raises interest rates while other central banks ease, the yen could strengthen, hitting Japanese bondholders hard. Japanese government bondholders will be largely impacted.
So, are we heading off to stagflation now? The signs, such as policy changes, trade uncertainty, layoffs, and economic fragility, all suggest that it is possible. But if it really is, then can we dodge this bullet?
