Specter of stagflation spooks Wall Street

San José, CA – On Friday, February 21, all the major U.S. stock indices fell. The broadest measure, the S&P 500, dropped more than 100 points. What scared the stock markets were a pair of indicators showing signs of rising inflation and a slowdown in the economy, which is commonly called stagflation.

The S&P Purchasing Managers Index fell in February to 51.6, just above the 50.0 line where the economy is neither growing nor shrinking. The services part of the index actually dropped below 50, to 49.7, showing that the service sector was starting to slow. The “Trump Bump” of economic and financial enthusiasm has ended after just a month in office, as concern rose among businesses about the impact of his tariffs and deportations.

A separate report, on the sale of existing homes by the National Association of Realtors, saw sales fall by almost 5% in January, as compared to December of 2024. Interest rates have been rising. Trump’s proposed tariffs have led to greater expectations of higher inflation. Mortgage interest rates topped 7% in January, making home loans more expensive to pay off. While higher interest rates affect the demand for homes, as Trump’s deportation raids begin to reduce the number of construction workers, the supply of new homes will fall, pushing prices up even more and making them even less affordable.

The University of Michigan’s Consumer Sentiment Index fell almost 10%, to 64.7 in February, down from 71.7 in January. A big part of this was the rise in expected inflation over the next year, from 3.3% in January to 4.3% in February.

The largest outbreak of stagflation in the United States was in 1973 and 1974, when inflation and unemployment rose. Typically, these indicators move in opposite directions. The recession and rising inflation showed the post-World War II economic boom in the United States was over, and that the relative decline of the U.S. economy had begun. Today’s stagflation is a sign that the U.S. economic decline is accelerating. While Trump was largely elected because of widespread dissatisfaction with the economy, especially inflation, in fact, his policies were going to accelerate both the economy’s decline and rising prices.

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