This New Stagflation Coming Won’t Feel Like the ‘70s.

Drivers queue at a gas station circa 1974. Gas prices jumped more than 35% over the course of that year. (Pictorial Parade/Archive Photos/Getty Images)

About the author: Joseph Brusuelas is chief economist of RSM US. His views do not represent the views of his employer.

Fifty years ago, the U.S. economy was plagued with stagflation—a stubborn combination of low growth, high unemployment, and elevated inflation. It was a true shock driven by oil embargoes in the Middle East: Gas prices tripled, inflation hit 14%, and unemployment soared toward 9%.

I can attest to tense rides in the gas-guzzling family car during periods of gasoline rationing in my native Southern California. Policymakers and the public ever since have lived in abject fear of returning to that painful period.

While the prospect of galloping, 1970s-style inflation remains low, today’s rising prices are troubling to the younger generations of Americans who were reared on the low inflation and interest rates of the ‘90s and 2000s. When combined with a predicted slowing of the economy and a softening labor market, today’s economy has the makings of what I call “stagflation lite.”

It isn’t your father’s stagflation. This version will feel more like how Ernest Hemingway described going bankrupt: gradually, then suddenly.

Unlike in the ‘70s, this time around, the U.S. is energy independent. It exports more oil than it imports and is far less dependent on oil as domestic manufacturing has declined. The rise of natural gas and alternative sources of energy also played an important role in this transition. The decreased dependency on oil helps temper inflation if the price of energy imports were to rise.

The labor market also looks different now. The ‘70s ushered women and baby boomers into the labor force, creating a labor surplus. Today, we are short of workers. Boomers are retiring, just as stricter immigration policies are culling the labor supply. And that shift in the number of available workers, along with President Donald Trump’s import tariffs, could be a potential game changer for the economy.

Should the immigration crackdown achieve its goal—and there is no reason to expect it won’t, given the $168 billion Congress has proposed in its spending bills to step up enforcement—economists may soon be explaining to a stunned public how constraints on the labor supply raise prices. Put simply, having fewer workers pushes up wages. Higher wages increase inflation and—most insidious of all—raise the expectation that elevated inflation will continue.

This is how stagflation lite will begin.

Federal Reserve Chair Jerome Powell has repeatedly warned of these risks, most recently in his congressional testimony last week. Policy-induced disruptions in trade, oil production, and immigration will put upward pressure on inflation and downward pressure on growth. In addition, major fiscal policy changes, such as the tax cuts and spending measures Congress is considering, will lead to large annual operating deficits. That will only add fuel to inflation.

These changes, in turn, will place constraints on the Fed’s ability to cut rates this year and beyond. Structurally higher interest rates will follow, and those rates will crowd out private investment and slow hiring.

The economy is likely to enter a period of slow growth in the 1% to 2% range. Inflation will hover between 3% to 4%, and unemployment will rise to 4.5% to 5%. While these economic conditions don’t match the double-digit interest rates and inflation and chronically high unemployment of the 70s, the stagflation-lite economic framework will still shock consumers.

Yes, the economy is likely to experience a sugar high following the coming tax cuts, which will temporarily send growth to 3% or higher. But the combination of new tariffs, tighter immigration policies, and sustained annual budget deficits will soon act as a drain on private sector investment as firms and households are priced out of the market.

Distortions across the economy will then begin to surface as firms without adequate resources consolidate in the face of higher interest rates. The businesses able to withstand these pressures will be those with deep pockets, such as private equity and private credit firms and large firms with enough cash to finance acquisitions.

Homeowners will feel the pinch, too. For a generation reared on low inflation and low interest rates, high mortgage rates will be a shock. It is happening even now; the current conforming rate sits uncomfortably close to 7%. This will continue to be a barrier to wealth-building. Just as high mortgage rates in the ‘70s put a chill in the housing market, stagflation lite will put home purchases out of reach for many consumers.

That squeezing of the homeowner will, in my estimation, be the U.S. economy’s breaking point—and what finally brings some of the administration’s policy choices to an end.

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