Experts Warn of Potential Stagflation in US Economy Following Release of GDP and Inflation Data

A pair of economic reports has sparked concerns of stagflation in the US economy, a scenario where inflation rises while growth stalls. The first-quarter GDP reading came in at a sluggish 1.6%, well below expectations, signaling a significant slowdown. In contrast, personal consumption expenditures exceeded forecasts, with inflation rising to 2.8%.

LPL Financial’s chief economist Jeffrey Roach warned of a potential resurgence of the stagflation debate, citing the need for investors to position themselves accordingly. Stagflation, last seen in the 1970s, led to high interest rates and a recession after a cycle of low growth and double-digit inflation.

While not the base case for analysts, the possibility of stagflation has become a topic of discussion among market experts. JPMorgan CEO Jamie Dimon has also raised concerns, referencing the 1970s as a cautionary tale for the current economic environment.

To hedge against rising risks, investors are advised to consider reducing exposure to equities and increasing exposure to fixed income. Alternative investments could also provide a buffer against potential market downturns.

Despite the warnings, Bank of America pushed back against the stagflation narrative, attributing the first-quarter GDP slowdown to inventory issues rather than a broader economic trend. The firm emphasized the resilience of consumer spending, suggesting that the threat of stagflation may be overstated.