Welcome to the economic tightrope: Prices are climbing, growth is sagging, and one wrong step could tip the U.S. into a stagflation trap. For months it was just a whisper. Now, it’s starting to seem like a siren.
Paul Krugman wasn’t the first to cry stagflation, but his voice is carrying. In a recent Substack post, the Nobel laureate laid out a compelling case: tariffs deep in Smoot-Hawley territory, a crackdown on immigration that’s choking labor supply, and private survey data flashing red. For Krugman, the question isn’t whether inflation is happening — it’s whether the stagnation part of the equation has arrived. And increasingly, the answer looks like yes.
The conditions are textbook. Inflation is running hot, GDP growth is losing altitude, and the job market is wobbling. The July payrolls report came in at just 73,000 jobs added — a third of expectations. Unemployment ticked up. And while official CPI data has yet to spike dramatically, private surveys tell a different story. Purchasing managers are reporting cost surges. The ISM Services index, typically a solid inflation predictor, suggests that 4% inflation could be just months away.
Torsten Sløk, the chief economist at Apollo Global, has said he’s watching the interplay among tariffs, a weakening dollar, and slowing growth. Sløk has consistently warned that surging tariffs, creeping inflation, and slowing growth are converging into a stagflation signal. He projects GDP to decelerate to around 1.2%, with inflation hovering stubbornly near 3% and unemployment ticking higher. He also highlights the drag from a weaker dollar and fractured global supply chains.
“Tariff hikes are typically stagflationary shocks — they simultaneously increase the probability of an economic slowdown while putting upward pressure on prices,” Sløk wrote in a June white paper. “This is the definition of stagflation.”
Wall Street’s caution isn’t just noise — it’s rooted in mounting evidence. At JPMorgan, economists have cut their 2025 GDP outlook to 1.3%, citing a one-two punch: Trump’s protectionist trade policy and a drop-off in business investment. Their recession probability is now at 40%, with corporate leaders reportedly hesitating to commit capital amid growing uncertainty around both tariffs and labor policy.
That hesitation is mirrored in investor behavior. Savvas Savouri, chief economist at QuantMetriks, told MarketWatch that he’s advising investors to take cover in inflation-protected bonds and gold, and sees strength in large-cap multinationals with pricing power and global revenue streams. Smaller firms with domestic exposure and high refinancing risk? Less so.
“If you look through the front windscreen rather than the rear-view mirror, it’s clear to see stagflation is coming to the U.S.,” he said.
Olu Sonola, the head of U.S. economic research at Fitch Ratings, agrees the warning lights are flashing. “The bottom line is that the risk of stagflation has risen meaningfully,” he wrote in a recent client note, pointing to sticky price growth and signs of labor market softening. It’s not just theoretical anymore — it’s creeping into the data. “Inflation is drifting further from target, private sector economic growth has slowed materially, and the labor market has just sounded a warning bell.”
Meanwhile, the Federal Reserve is trapped. Policymakers are watching growth cool while inflation sticks, and the levers they have are blunt. Rate hikes risk pushing the economy into recession. Cuts risk unleashing another inflationary spiral. So for now, the Fed is standing still — a position that makes sense tactically but leaves them exposed if either side of the equation worsens.
What’s fueling the shift? For starters, tariffs. Trump’s second-term agenda has reversed nearly a century of trade liberalization. Average tariff rates are back to levels not seen since the 1930s. And since the U.S. economy is far more trade-exposed than it was then, the pain hits harder. Krugman pointed out that imports as a share of GDP are roughly triple what they were in 1930, so the inflationary shock is magnified. As he put it: “A tariff is basically a selective sales tax.” And with a 15-point spike in effective rates, prices are heading in one direction.
Then there’s labor. ICE raids and deportations have led to a visible decline in the number of foreign-born workers—a reversal of years of growth. The result? Crops left unpicked, construction projects stalled, and industries that rely on immigrant labor struggling to staff up. That puts pressure on supply, which puts pressure on prices.
If there’s been a saving grace in the past six months, it’s been AI. A torrent of data-center investment, GPU orders, and cloud infrastructure buildouts has propped up industrial activity even as consumer sectors lose steam. Krugman credits the AI boom as the reason the slowdown hasn’t been more severe. But that boost has its limits. Hardware stockpiling is finite. Compute buildouts are cyclical. And once those orders slow, there’s no obvious next engine of growth. Sløk also flagged concerns that markets, particularly the “Magnificent Seven” tech giants, aren’t pricing in the earnings risk that would come with a stagflationary slowdown.
At the same time, policy volatility is scaring off private investment. The uncertainty around tariffs has become its own tax. Companies don’t know whether they’ll be paying 10% or 35% duties next year. Trump has made apparent “deals” with some trading partners, but they aren’t formalized. Immigration policy is equally unstable. All of these factors are combining to muddy the water for business investment, which is already softening.
Two years ago, economists were praising an immaculate disinflation: Inflation fell even as growth held strong. Now, we’re looking at the reverse. Inflation is rising, growth is stalling, and confidence is eroding.
For the moment, the labor market is the last line of defense. But even that is starting to fray. Initial unemployment claims are inching higher. Wage growth is slowing. The quit rate is down. And services hiring is falling to levels associated with GDP growth of just 0.5%.
This, as Krugman notes, is what Goldman Sachs calls “stall speed” — a point at which the labor market begins to weaken in a self-reinforcing cycle. Once momentum slows, employers stop hiring. That leads to lower consumption, which leads to even less hiring. And unlike a standard recession, where inflation falls as growth contracts, stagflation offers no such symmetry. Prices keep climbing even as payrolls shrink.
JPMorgan Chase CEO Jamie Dimon and other heavyweights have increasingly added their voices, warning that rising deficits, erratic fiscal policy, and geopolitical instability could light the fuse on stagflation. Economist Peter Schiff told Fox Business in mid-June that there could be “a protracted recession, probably a much worse financial crisis than 2008” if the Fed doesn’t regain control. Schiff predicted stagflation and warned of a “global exodus” out of U.S. stocks and bonds as foreign investors increasingly retreat from American assets.
Still, some economists push back. They argue that while the risks are real, the 2020s aren’t the 1970s. The labor market remains more flexible. Inflation expectations are better anchored. And the Fed has far more credibility today than it did during the Nixon-to-Carter era. Matthew Jeffrey Vegari of Clearwater Analytics argues that while rising tariffs and inflation raise concern, the U.S. isn't facing a 1970s‑style stagflation. Today’s stronger labor market and Fed credibility suggest a slowdown that’s serious — but far from catastrophic.
Still, it’s hard to make long-term plans when everything feels provisional. And right now, too much does. Krugman, for his part, isn’t making predictions — just observations. But his conclusion is hard to misinterpret: Inflation is rising, stagnation is here, and together they’re shaping the most fragile recovery in over a decade.