Experts warn of stagflation shock in US: What it is
What's the story
Ben Powell, the Chief Middle East and Asia Pacific Investment Strategist at BlackRock Investment Institute, has warned of a possible "stagflation shock" in the US economy.
The prediction comes as new tariffs on Canada, Mexico, and China are due to come into effect.
Powell believes these tariffs could severely restrict the Federal Reserve's ability to respond effectively.
Stagflation is an economic condition where high inflation, slow economic growth, and high unemployment occur simultaneously. It poses a significant challenge to policymakers.
Economic impact
Powell warns of potential economic turbulence
The introduction of new tariffs has prompted retaliatory measures from other countries, with Canada and China already announcing their own counteractions.
This creates a structural reality that investors will have to adapt to in the coming years.
Powell explained that these higher costs from tariffs could translate into reduced spending by consumers and businesses, leading to slower growth.
Inflation concerns
Dual threat of inflation and slow growth
Powell emphasized the higher costs from tariffs could further fuel inflation by raising prices on construction and imports.
"It is that uncertainty which is something that we do know. We don't know exactly if the tariffs are going to persist in what numbers, but the tariff uncertainty, for sure, is already weighing on sentiments, both in markets and economies," he added.
The US economy may suffer from both inflation and stagnation, hence the term "stagflation."
Fed's options
Powell questions Federal Reserve's potential response
Powell remains skeptical about the Fed's ability to cut rates to support growth.
He said BlackRock Investment Institute believes the Fed is waiting to see how much inflation rises due to these tariffs, which could have a major impact.
This could leave the Fed with fewer options to respond, as markets are currently focused on slow growth while inflation is also a big issue.
Growing concerns
Why stagflation is difficult to control
Typically, when inflation is high, governments might raise interest rates to cool down the economy. However, this could further slow down economic growth and increase unemployment.
Conversely, if the economy is stagnant and unemployment is high, governments might lower interest rates or increase spending to stimulate growth. But this could exacerbate inflation.
Therefore, stagflation presents a difficult dilemma for policymakers.