Worries are spreading, and Wall Street is beginning to feel anxious that "American stagflation" is back

According to the Zhitong Finance APP, a series of recent data released by the United States indicates rising inflation and slowing economic activity, raising concerns about stagflation in the market. After a strong holiday season, consumer spending in the U.S. saw its largest decline in nearly four years in January. Americans are becoming increasingly pessimistic about the economic outlook, with businesses warning that prices will rise following the aggressive tariff policies of the Trump administration. Meanwhile, U.S. financial markets also reacted this week, with cross-asset anxiety volatility reflected in rising bonds and falling stocks, as well as declines in risk assets like Bitcoin.

Although economists caution against placing too much emphasis on a single month's data, especially when influenced by factors such as cold weather, if the risk of stagflation becomes a reality in the coming months, the Federal Reserve will face a difficult choice between supporting the labor market or ending years of inflation struggles.

Gregory Daco, Chief Economist at EY, stated, "There is a scent of stagflation in the air. But we are not there yet. The developments, particularly over the past week, show that confidence indicators are softening, spending is also softening, and concerns about inflation—at least inflation expectations—are rising."

The main reason for the deteriorating sentiment is President Trump's economic agenda, which includes imposing punitive tariffs on the U.S.'s largest trading partners and pledging significant cuts to public spending—actions that have already led to layoffs of federal government workers.

So far, the most concerning signals come from surveys of expectations and sentiment. The consumer confidence index in February recorded its largest decline in nearly four years, reflecting a widespread decrease across all age groups and income levels. Inflation expectations for the next year have risen to their highest level since 2023, reflecting recent increases in egg costs and price hikes resulting from the tariffs proposed by Trump.

Meanwhile, dragged down by the service sector, the pace of business activity expansion this month is the slowest since September 2023, while the decline in retail sales in January is the largest in nearly two years. The latest GDPNow forecast from the Atlanta Fed indicates that U.S. economic activity will contract in the first quarter—although early estimates may fluctuate in the coming months.

Ajay Rajadhyaksha, Chairman of Global Research at Barclays, said, "If consumer confidence declines, at some point you will start to worry that consumption is actually the next problem."

Businesses of all sizes are also warning about the future. Ford Motor Company's CEO Jim Farley stated that imposing a 25% tariff on Canada and Mexico would "punch a hole" in the U.S. auto industry. He warned of potential tariffs on foods like avocados and limes used in Mexican barbecue. Meanwhile, smaller businesses reported that they have frozen expansion plans, raised prices, and are concerned about their profits. According to a poll, nearly 60% of American adults expect Trump's tariffs to lead to price increases.

This aligns with the views of Arin Schultz, Chief Growth Officer of Naturepedic, a company in Cleveland, Ohio, that produces organic mattress pads. The company just had its best year ever due to strong consumer demand, but the new tariffs on raw materials sourced from overseas will have an impact. His request to the new administration is to eliminate tariffs on materials that cannot be produced in the U.S. economically.

Schultz stated, "We have quite a few components that are not made in the U.S. Even so, I think the cost of domestic sourcing will drive up our costs."

Impact of the Federal Reserve

U.S. Treasury yields have significantly dropped from the peak reached on January 20, before President Trump's inauguration, as bond investors begin to digest that the Federal Reserve will have to shift from excessive concern about inflation to greater worries about economic growth. Federal Reserve officials are starting to acknowledge that economic growth may slow while inflation remains high. This situation has long troubled central bank officials seeking to control prices and maximize employment.

These two goals are contradictory: lowering interest rates to support the labor market while risking triggering inflation. However, maintaining high rates to curb price increases could lead the economy into recession. If history is any guide, the Federal Reserve will take aggressive action to control prices and future inflation expectations. In the 1970s and 80s, this meant raising rates to staggering high levels, which in turn pushed up unemployment and caused significant economic pain.

This time, the Federal Reserve has significantly cooled inflation without triggering an economic recession, largely because inflation expectations have remained low. As rates rise, inflation has not returned to target, and even if the economy weakens, the Federal Reserve may be forced to keep borrowing costs high.

KPMG Chief Economist Diane Swonk stated, "Their response to the last rate hike may have been slow, but stagflation is a completely different matter for the Federal Reserve. They cannot allow that to happen."

Trump promised that his combination of tax cuts, deregulation, and increased tariffs would unleash a wave of investment throughout the economy. Stephen Miran, the chairman of the White House Council of Economic Advisers nominated by Trump, told lawmakers on Thursday that even with high tariffs, the U.S. could have an "amazing economy." But for now, businesses are feeling concerned.

J.D. Ewing, operator of Pennsylvania-based office furniture wholesaler COE Distribution, stated, "If our prices go up, our customers' prices will also rise. It is necessary to fully understand this. If it is a one-size-fits-all implementation, there will be no choice, and everyone's costs will increase."

Anxiety and Volatility in the U.S. Financial Markets

The anxiety triggered by the latest economic report has spread throughout the market. Although Friday's late-session rebound boosted the S&P 500 index, investor sentiment has been deteriorating, and even a mild inflation report still raises warnings about consumer spending. The result is that U.S. Treasury bonds have recorded the strongest start to a year since the crisis erupted in early 2020, while the stock market has nearly erased its gains for 2025.

The stock market rebounded sharply on Friday, narrowing the losses for the second consecutive week, marking a highlight in the market's turbulent period. Now, with the so-called Trump trade excitement fading, managers at large funds like Manulife Asset Management and Penn Mutual Asset Management have been cutting stock positions while increasing bond exposure.

Nathan Thooft of Manulife Investment Management stated, "If consumer confidence significantly weakens and businesses retract growth plans, the deterioration of economic growth will become a major obstacle. There is almost no room for policy missteps."

February is a microcosm of cross-asset divergence. A long-term government bond index rose by 5.3%, while an ETF tracking U.S. large-cap stocks fell by 1.3%; this is the largest performance gap since June 2022.

An increasing number of people are worried that potential tariff threats, a stubborn Federal Reserve, or tightening consumers are putting pressure on the U.S. growth engine, triggering a risk-averse sentiment. Even with a sudden rebound on Friday (possibly spurred by constructive tariff news), the Nasdaq 100 index still plummeted over 3%, marking the largest single-week decline of the year, while the S&P 500 index fell about 1% this week. Bitcoin dropped to its lowest level since early November last year, down over 20% from its historical peak. The yield on the 10-year U.S. Treasury bond was close to 4.8% in January and is now near 4.2%. Wall Street's "fear gauge"—the VIX index measuring stock volatility—and similar credit volatility indicators are close to their highest levels for 2025.

Citi's data shows that the outlook for the U.S. economy is becoming increasingly bleak, with the gap between actual data and forecasts narrowing to its lowest level in seven months. Consumer confidence has fallen to its lowest level since 2021, personal spending unexpectedly declined, and data from the U.S. real estate market has barely met expectations over the past ten days The Atlanta Federal Reserve's forecast on Friday indicated that the annualized U.S. GDP for this quarter may decline by 1.5%, a significant drop from the previously expected growth rate of 2.3% just a few days ago.

Although the market reacted quickly, some believe this is short-sighted, especially considering the rapid alternation between economic growth and inflation. Cayla Seder, a macro multi-asset strategist at State Street Global Markets, noted that many negative economic news items have emerged from survey-based reports. She stated that with a monthly income growth rate of 0.9% and an unemployment rate hovering around 4%, it is still too early to declare that economic expansion is in serious trouble. Seder said, "So far, the weakness has been concentrated in soft data rather than hard data. We are still seeing strong overall consumption, even as favorable factors have diminished."

Nevertheless, market sentiment has been rapidly deteriorating, considering how much wealth is held in risk assets; market sentiment itself is a potential economic stimulus factor. A survey by the American Association of Individual Investors showed that individual investors' pessimism about the short-term outlook for the stock market has risen to the third highest level since 2009. The spread on blue-chip corporate bonds has reached its highest level in over three months.

Anxiety over the upcoming U.S. tariff deadline has heightened Wall Street's concerns. Due to the Trump administration's previous delays and changes to the deadline, the uncertainty surrounding the actual implementation of tariffs remains high.

According to George Cipolloni, a portfolio manager at Penn Mutual Asset Management, which manages $39 billion in assets, the new government's implementation of prudent fiscal policies will put greater pressure on the market. He has reduced his exposure to U.S. stocks while increasing long-term investment-grade stocks in preparation for higher volatility.

Cipolloni stated, "The new administration has brought many changes, causing some panic among corporate executives and global leaders. After setting a standard for extremely wasteful spending, the market may need a period of adjustment and could experience significant volatility."