Stagflation Is Starting to Rear Its Ugly Head. But Investors Don't Need to Panic Just Yet.

Over the past several years, there have been frequent concerns about stagflation, characterized by high or elevated inflation, rising unemployment, and low growth. This particular situation wreaked havoc on the economy in the 1970s, which is why investors get spooked at just the smallest whiff of stagflation.

While stagflation concerns dissipated over the past year, they have once again reared their ugly head, as recent economic data and the conflict in Iran have quickly renewed concerns. While it's certainly understandable for investors to be worried, I don't believe it's time to panic just yet. Here's why.

Economic conditions have deteriorated

I won't sugarcoat it: Signs of stagflation have certainly emerged. The Federal Reserve's preferred measure of inflation, the personal consumption expenditures (PCE) price index, rose 2.8% year over year and 0.3% from the previous month. The headline 2.8% number actually came in slightly better than expected, which is good news.

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However, that's still well above the Fed's 2% target rate, and the number will likely be much higher when the March PCE price index is released, due to surging oil prices resulting from the conflict in Iran. The core PCE number, which strips out more volatile food and energy costs, came in at 3.1% and rose 0.4% during the month, slightly higher than expected, which is a bad sign.

What's more, the U.S. Commerce Department revised fourth-quarter gross domestic product (GDP) growth to 0.7%, down from its previous estimate of 1.4%. Earlier this month, the Bureau of Labor Statistics (BLS) reported that the economy lost 92,000 jobs, well below expectations of 50,000 jobs added. Concerns about artificial intelligence (AI) replacing jobs through automation have become more apparent, as companies announce layoffs, citing AI disruption.

As I mentioned above, rising or elevated inflation combined with higher unemployment and low growth is indicative of stagflation. This also makes the Fed's job more difficult because the central bank's dual mandate of stable consumer prices and maximum employment is hard to achieve when its use of monetary policy could help improve one mandate while potentially worsening the other.

Wall Street strategists have also recently lowered their expectations for interest rate cuts this year, with some even predicting the Fed won't cut rates at all in 2026.

Why investors shouldn't panic just yet

Recent economic data is not good, to be sure, but there are reasons investors can remain optimistic. First, much of Wall Street initially expected inflation to rise in 2026, peak, and then fall back below 3% toward the end of 2026, so, regardless of the conflict in Iran, inflation was expected to increase.

The government shutdown that consumed most of October and November last year also likely made inflation look artificially better than it had been. That's because the Bureau of Labor Statistics did not collect data for its regular inflation report and therefore assumed no growth in prices that month, despite the fact that there was almost definitely some growth.

Finally, while I have no idea what will happen with the Iran conflict or how long it might last, it's entirely possible that it doesn't last long, which would likely send oil prices much lower. After all, before concerns about the conflict even happening, most analysts didn't have a strong outlook for oil prices in 2026. Ultimately, it's entirely possible that the conflict is short-lived and inflation follows the expectations of market strategists heading into this year, peaking in the middle to the latter part of the year before falling.

It's also possible that even if the conflict in Iran becomes a longer-term affair, the Fed may still find a way to lower interest rates, especially if GDP keeps falling and unemployment rises. While the Fed has a dual mandate, it's likely to prioritize the one it views as most problematic. A slower-growing economy or a recession could also squash demand and stabilize prices.

Now, I would caution investors from getting bullish, because again, nobody knows how this conflict in Iran will ultimately play out. But long-term investors shouldn't react to short-term shocks or concerns, so they don't need to panic yet.

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