Stagflation Fears in US: Why We Just Cannot Look Away

Indian equities are likely to face pressure, even as weak exports drag down the country's GDP

- DHIRAJ RELI

As the world's largest economy faces rising stagflation risks -marked by high inflation and unemployment-policymakers globally are watching closely. This article looks at how US stagflation could influence its markets, and India.

Understanding stagflation and risks: Stagflation is when inflation rises even as growth stalls, often with higher unemployment. Unlike demand-driven inflation from robust consumer spending, stagflation results from supply shocks or external disruptions. For instance, in the 1970s, when Arab OPEC nations imposed an oil embargo on the US after the 1973 Arab-Israel war. Oil prices spiked, inflation surged, and the US economy slowed. By 1980, inflation hit 14% and unemployment rose. The US Fed, led by Paul Volcker, hiked interest rates to 20% to control prices.

Today, several factors are again raising stagflation risks in the US:

Rising import tariffs: Proposed higher tariffs—particularly on Chinese goods—could inflate the cost of imports. Since the US is consumption-driven and dependent on imports, this poses a serious inflationary risk. Notably,