Stagflation Risk Analysis 2025

Amid Trump Policy Uncertainty

Last Updated: April 2, 2025

Executive Summary

Current Stagflation Risk Assessment: ELEVATED (7/10)

The U.S. economy currently faces an elevated risk of stagflation—a challenging economic environment characterized by high inflation, slow growth, and rising unemployment. Our comprehensive analysis indicates that while not yet in a full stagflationary state, several warning indicators have emerged that merit close attention from policymakers, investors, and business leaders.

Key Findings

  • Core PCE inflation projected to reach 3.5% by end-2025, well above the Federal Reserve's 2% target
  • GDP growth forecast reduced to 1% for 2025, the lowest since 2020
  • Unemployment projected to rise to 4.5% by end-2025
  • New tariffs announced April 2, 2025, creating significant stagflationary pressure
  • Goldman Sachs has increased recession probability to 35%
  • Traditional safe havens (Gold, Bonds) outperforming while equity markets under pressure
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Stagflation Risk Meter

7
ELEVATED
Low Risk High Risk

Macro Indicators Dashboard

GDP Growth

5/10

Forecast reduced to 1% for 2025, down from previous 2.5% projection

Declining trend

Inflation Stability

3/10

Core PCE projected at 3.5% by end-2025, well above 2% target

Worsening trend

Labor Market Health

6/10

Unemployment projected to rise to 4.5% by end-2025

Deteriorating trend

Consumer Strength

5/10

Consumer sentiment fell 11% last month to lowest level since 2022

Declining trend

Business Investment

4/10

Policy uncertainty dampening business investment plans

Declining trend

Monetary Policy Stance

5/10

Fed facing policy dilemma between inflation and growth concerns

Neutral trend

Financial Markets

6/10

S&P 500 down 4.01% YTD, defensive sectors outperforming

Deteriorating trend

Global Economic Pressures

3/10

Trade tensions rising, potential for retaliatory tariffs

Worsening trend

Forward Risk Outlook

3/10

Recession probability increased to 35% (Goldman Sachs)

Worsening trend

Policy Analysis: Trump 2025 Scenarios

Overview of Trump's Tariff Policies

President Donald Trump has implemented and proposed several significant tariff policies since returning to office in 2025, which have substantial implications for stagflation risks in the United States.

Key Policy Implementations:

  • February 2025: 25% additional tariff on imports from Canada and Mexico, 10% on China
  • March 2025: 25% tariff on imports of automobiles and certain automobile parts
  • April 2025: Proposed global tariff plan of approximately 20% on most imports

Inflation Component

  • Estimated cost to American households: $5,200 annually
  • Potential 1.7-2.1% increase in overall price levels
  • Supply chain disruptions increasing production costs
  • Long-term inflation expectations at three-decade high

Stagnation Component

  • Potential recession if permanent tariffs trigger robust retaliation
  • Unemployment rate could rise above 7% in worst-case scenario
  • Previous similar tariffs created just 1,000 steel jobs while costing 75,000 jobs in steel-using industries
  • Policy uncertainty hampering business investment

Stagflation Risk Assessment

Short-term Outlook (6-12 months)

  • Immediate price increases across multiple sectors
  • Business uncertainty leading to delayed investments
  • Market volatility as policies are implemented
  • Initial supply chain disruptions

Medium-term Outlook (1-2 years)

  • Potential recession if tariffs remain and partners retaliate
  • Persistent inflation above target levels
  • Reduced economic growth
  • Rising unemployment
  • Classic stagflation scenario becoming increasingly likely

Institutional Responses

Goldman Sachs Perspective

Economic Forecasts:

  • Recession Probability: Increased from 20% to 35%
  • Inflation Forecast: Raised to 3.5% by end-2025 (from 2.8%)
  • Unemployment Projection: Increased to 4.5%
  • GDP Growth Forecast: Reduced to 1%
  • Tariff Rate Assumption: Raised to 15% on all goods

Market Implications:

  • S&P 500 Forecast: Slashed year-ahead target from 6,500 to 5,900
  • Near-term Outlook: Expects S&P 500 to decline 5% over next three months
  • Stagflation Index: Stocks that thrive during stagflation have been soaring

Citadel Investment Positioning

Ken Griffin's Assessment:

"Trump's tariff policy was a threat to economic growth that could force other countries into new trade alliances."
  • Emphasized uncertainty hampering multinational planning
  • Warned policies could make American companies less productive
  • Concerned about U.S. debt impact

Investment Strategy:

  • "Play offense" during market selloffs
  • Diversification across sectors, including $1B in natural gas assets
  • Wellington fund rose 1.4% in January 2025, showing resilience
  • Preparing for increased economic uncertainty and potential stagflation

Implications for Investors

  • Inflation protection assets warranted in portfolios
  • Reduced growth expectations suggest adjusting equity allocations
  • Sector selectivity critical - focus on companies with pricing power
  • Close monitoring of both tariff developments and Federal Reserve responses
  • Global diversification important as trade relationships evolve

Asset Class Performance Overview

Market Performance in Stagflationary Environment

The current macroeconomic environment shows clear signs of stagflationary pressures, with asset performance reflecting this challenging backdrop.

Asset Class YTD Return (%) 12-Month Return (%) Stagflation Resilience
Gold +17.17 +35.17 High
Real Estate +4.20 +12.38 High
US Bonds +3.11 +6.36 Medium
Dow Jones -0.95 +7.32 Medium
Oil +0.19 -5.13 Medium
S&P 500 -4.01 +8.09 Low
US Dollar -4.68 +0.02 Low
Nasdaq -9.50 +7.20 Low
Russell 2000 -9.83 -3.08 Low
Bitcoin -10.93 +27.47 Uncertain

Key Performance Trends

  • Traditional Safe Havens Outperforming: Gold and US Bonds showing strength as inflation hedges
  • Real Estate Showing Strength: Historically performs well during inflationary periods
  • Equities Under Pressure: Recent weakness despite prior strength suggests markets pricing in stagflation risks
  • US Dollar Weakening: Reflects concerns about U.S. fiscal position and potential for stagflation

Investment Implications

  • Defensive Positioning Warranted: Gold, quality bonds, and real estate with inflation-linked income
  • Equity Selectivity Critical: Focus on companies with pricing power and low debt levels
  • Diversification Benefits: Traditional 60/40 portfolios may struggle in stagflationary environment
  • Time Horizon Considerations: Short-term volatility likely to remain elevated

Forward-Looking Indicators and Watchlist

Key Stagflation Risk Indicators to Monitor

This watchlist provides a comprehensive framework for monitoring stagflation risks, with specific thresholds that signal warning and critical levels.

Inflation Indicators

Indicator Current Value Warning Threshold Critical Threshold Frequency Status
Core PCE 3.5% (forecast) Above 3.0% Above 4.0% Monthly Warning
Michigan 1-Year Inflation Expectations 4.9% Above 4.0% Above 5.0% Monthly Warning
2-Year TIPS Breakeven Rate 3.27% Above 3.0% Above 3.5% Daily Warning

Economic Growth Indicators

Indicator Current Value Warning Threshold Critical Threshold Frequency Status
Conference Board LEI -1.0% (6-month) Below -1.0% Below -4.2% Monthly Warning
Composite PMI 53.0 Below 50 Below 45 Monthly Normal
Michigan Consumer Sentiment Lowest since 2022 Below 70 Below 60 Monthly Warning

Labor Market Indicators

Indicator Current Value Warning Threshold Critical Threshold Frequency Status
Unemployment Rate 4.5% (forecast) Above 4.5% Above 5.0% Monthly Warning
Employment Trends Index Declining 3 consecutive declines 6-month rate below -5.0% Monthly Warning

Policy Uncertainty Indicators

Indicator Current Value Warning Threshold Critical Threshold Frequency Status
Average Tariff Rate 15% (forecast) Above 10% Above 15% As announced Critical
Fed Funds Futures Rate hike expectations Rate hikes while growth slowing Multiple hikes while growth below 1.5% Daily Warning

Composite Stagflation Risk Indicators

Indicator Current Value Warning Threshold Critical Threshold Frequency Status
Misery Index Improved since June 2024 Above 10 Above 12 Monthly Normal
Recession Probability 35% (Goldman Sachs) Above 25% Above 40% Monthly Warning