US Economy Shows Early Signs of Stagflation as Inflation Rises and Job Market Weakens
Two major reports released Thursday suggest the US economy could be sliding into stagflation — the troubling combination of sluggish growth and rising prices.
Normally, weak economic growth leads to falling prices. When people lose jobs or fear layoffs, they cut back on spending, forcing businesses to lower prices. But when prices keep climbing despite falling demand, it signals a deeper imbalance.
Inflation climbs, job market weakens
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Consumer prices rose 0.4% in August, pushing the annual inflation rate to 2.9%, the highest since January. That’s up from 2.7% in July.
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At the same time, first-time jobless claims hit a four-year high, with 263,000 people filing for unemployment benefits in the week ending September 6, according to the Labor Department.
Harvard economist Jason Furman summed up the concern on Bluesky: “The whiff of stagflation is getting stronger. There are no good options for the Fed given the circumstances we’re facing.”
What stagflation means
“Stagflation,” a blend of stagnation and inflation, is one of the toughest economic problems to solve.
During the inflationary spike of 2022, prices were painfully high — but strong job growth and stimulus support helped cushion the blow. Today, however, inflation persists while the job market shows cracks. That means consumers are facing the double hit of higher prices and rising unemployment.
The Fed’s dilemma
For the Federal Reserve, the situation is a policy nightmare. The Fed typically raises interest rates to cool inflation and lowers them to support jobs. But in stagflation, those goals conflict: easing unemployment risks fueling inflation, while fighting inflation risks worsening job losses.
Adding to the pressure, the Fed faces political headwinds. President Donald Trump has repeatedly criticized the central bank, while some in the White House push to influence its decisions.
Next week’s Fed decision
All eyes now turn to the Fed’s policy meeting next week. Chair Jay Powell has already signaled that a rate cut is likely, citing weakness in the labor market. The big question is how deep the cut will be — the usual 0.25% or 0.5%, or something more aggressive to appease Trump, who has called for sharper reductions.
Complicating matters further, Trump’s top economic adviser Stephen Miran could be confirmed to the Fed’s Board of Governors just as the meeting begins, potentially reshaping the debate inside the central bank.
With stagflation risks rising, the Fed’s next move will be watched closely by Wall Street, policymakers, and households alike.