Maybe this is the year that stagnation will return to the US? Half a century has passed: The last time the US economy had both excessively high inflation and unjustifiably high unemployment was in the mid -1970s, with inflation rates reaching 12.2% in 1974 and unemployment in 8 5% in 1975.

The new stagnation is unlikely to be so extreme. The latest inflation report reached 3% for 2024, from 2.4% in September. However, there is a few indications that the percentage falls. Recent data show that rents will increase at a moderate higher rate than in the past, and housing costs represent about one -third of the consumer price index. The continued increase in wages is another inflationary pressure.

Then there is President Donald Trump’s commercial policy. It remains to be seen whether duty policy will prove to be durable, but current policy will probably lead to some increases in retail prices. Even if most of the duties are abolished, or never established, producers will think twice before constructing additional “financial bridges” to Canada and Mexico. In the following years, this will lead at higher costs and ultimately higher prices.

In addition, Federal Reserve (Fed – Federal Bank of the US) reduced interest rates by 25 basis points in December, A decision that now seems wrong. This move is more likely to motivate than to relieve inflationary pressures.

Of course, many of these problems were pre -existing by the Trump government, so even if Trump changes course in some policies, much of the basic dynamics already exist. In any case, Trump’s current designs are not suitable for fighting stagnation. Kevin Hasset, one of Trump’s financial advisers, has stated that the inflation plan was lower overall demand and increased work supply, but this is unlikely to succeed. The US is already close to full employment and the lowest overall demand can stimulate or accelerate a recession.

And it gets even worse. Trump is a long -term lover of low interest rates and easy money, for example, and one scenario is that he is trying to impose his will on the Fed, leading to higher inflation rates. A more likely result, but still bad for inflation, is that real or endangered Trump interventions make management in the central bank more difficult. This could limit Fed’s ability to reduce the rate of inflation in a smooth way. Fed’s predictability and reliability are just much harder to consolidate In the present environment.

What about unemployment? There is a general consensus that the labor market has generally remained stable, but recruitment is slowing down and people are less likely to abandon their work. The general situation seems more vulnerable. In the meantime, the global geopolitical class is shaking and current policy uncertainty can harm the prospects for domestic investment. Although I am optimistic about the financial prospects of artificial intelligence, progress could be more abnormal than smooth.

If you accept the idea that inflation is more likely to increase than to fall and that the labor market is more likely to worsen than to improve, then the chances of a moderate stagnation are quite high.

Many commentators predicted stagnation when the inflation rate increased to 8.9% after Covid and the Fed had to be reduced. However, stagnation did not come, perhaps because its Fed and its policy were so reliable and expected. It is harder to expect the same today.

The good news, if this is the right adjective, is that this is likely to be one of the mildest stagnation in history. But how will voters react to higher inflation, especially when Trump made a campaign and won partly promising to put an end to inflation? The likelihood of a political error seems particularly high. Trump could even look at a combination of a corporate scapegoat and start wage and prices, as Richard Nixon did.

The more general reality is that macroeconomic policy, no matter who is president, does not offer many useful tools To combat stagnation without causing a recession. Many macroeconomic advice consists of either decreasing or increasing overall demand and none of these decisions will solve all problems in a stagnation.

So is it time for panic? No, it’s never time for panic. But maybe it’s time to think about moving to level “Marginally higher emotional concern”.