The term “stagflation” has started to be discussed as economic uncertainty has risen early in President Donald Trump‘s second term. Here is what it means and why it matters.

Trump entered office promising a rework of the government and economic policy, with tariffs being a key change. But markets have started to react fearfully to such an aggressive trade policy as the Federal Reserve still works to drive down persistent inflation. Some investors and market observers have grown worried that a recession may be on the horizon.

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Trump and his allies, like Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick, have conceded that there might be some economic turbulence given the big changes, but some economists are warning that the situation could become even more dire.

So, what is stagflation?

Stagflation is seen as one of the worst economic scenarios that could play out. Stagflation, a portmanteau of “stagnation” and “inflation,” is when prices are rising while economic growth and the labor market are languishing.

The term was coin in the 1970s, when the economy suffered both high inflation and rising and high unemployment. Before then, many leading economists thought that combination was impossible. Instead, they believed that higher inflation could be traded off for lower unemployment.

“You ordinarily expect to see inflation when the economy is overheating and output is growing very strongly, but instead that was a period when inflation was rising even as the economy was actually often in recession,” Steve Kamin, a senior fellow at the American Enterprise Institute who is an expert in monetary policy and macroeconomics, told the Washington Examiner.

Kamin said the proximate reason for the stagflation in the 1970s were the big price increases in oil around that time period. He warned that Trump’s tariffs and proposed tariffs could cause a similar effect to those oil shocks.

The last time there was this much talk about stagflation was in 2022 at the height of the country’s inflationary wave. But those fears didn’t end up panning out because the labor market remained strikingly resilient and the economy kept expanding.

What is behind this?

Recent changes in various economic gauges, projections, and consumer surveys have caused some alarm and led to discussion about stagflation. Also, the stagflation chatter hit a recent high this week when the Fed indicated it expects inflation to stay higher for longer and the economy to slow.

Inflation peaked at about 9% in the middle of 2022, according to the consumer price index. That is the highest it had been in decades and well above the Fed’s goal of steady 2% inflation. Inflation has notably fallen quite a bit since the Fed first hiked interest rates, but it is still above what is considered healthy.

Inflation was at 2.8% in February, a slight downward tick, but a decline that followed four straight months of inflation trending back up from a recent low of 2.4% in September.

The Fed releases a closely watched summary of economic projections every other meeting and this week showed the first update since December and the first since Trump took the reins of the economy.

From Wednesday’s summary of economic projections, the median official now expects inflation to clock in at 2.7% at the end of the year, up from the previous December estimate of 2.5%. The Federal Open Market Committee now expects inflation to finally fall to around 2% by 2027.

Also notable, the Fed projects core inflation, which strips out volatile food and energy measures, to be at 2.8% by the end of the year — up from 2.5% when it did its last projection in December.

Those projections of too-high inflation are also coupled with warnings that economic growth, as measured by gross domestic product, will slow down as well.

GDP growth has been positive for about five years, aside from a slight decrease in the first quarter of 2022.

But the Atlanta Fed’s “GDPNow” tracker predicts that GDP growth in the first quarter will fall by 1.8%, according to the latest estimate. Still, it must be noted that the GDPNow tool is constantly changing and updated with incoming economic data, so the projection of negative GDP growth might not pan out.

The Fed itself doesn’t see GDP going negative, on balance, during 2025 — but it now does see it slowing. The Fed as of this week’s meeting predicts modest 1.8% growth in 2025, down from a projection of 2.1% in December.

In a note to clients this week, JPMorgan’s chief U.S. economist Michael Feroli said the projections “were revised in a stagflationary direction.”

Ryan Young, a senior economist at the Competitive Enterprise Institute, which generally opposes tariffs, said he thinks that the economy is moving in the trajectory of stagflation.

“We are heading in that trajectory, but it doesn’t mean it’s going to actually happen. That remains to be seen,” he told the Washington Examiner.

The tariff factor

A lot of what is driving not only the stickier inflation projections but also the slower GDP growth forecasts is Trump’s tariff policy.

Trump has embarked on a more-aggressive-than-expected trade policy since entering office. He slapped tariffs on U.S. allies like Mexico and Canada, much to the chagrin of the markets, and is now planning to pursue reciprocal tariffs against much of the world in the next few weeks.

Trump told the nation during his joint address to Congress earlier this month that his aggressive tariff policies would cause “a little disturbance” a day after the stock market tanked. And officials like Bessent, the Treasury chief, have said there will be an adjustment period in the markets.

Economists agree that tariffs lower living standards, but some argue that hiking tariffs could exacerbate inflation and hinder the Fed’s effort to drive down price growth. Fed Chairman Jerome Powell hinted at that during remarks to reporters this week.

He said that Trump’s tariffs will affect the Fed’s price stability goals, but emphasized that there is still much uncertainty about the scope and scale of the tariffs.

“I do think with the arrival of the tariff inflation, further progress may be delayed,” he told reporters.

Powell said the projections showing little progress on inflation in 2025 is largely due to the central bank’s expectations for tariff-driven inflation.

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While the first round of tariffs raised fears of an economic slowdown, Trump plans to levy reciprocal tariffs on trading partners on April 2.

That would be the imposition of tariffs of equal size of any tariffs placed by other countries on the U.S. So if one country has a 10% tariff on U.S. goods, Trump could simply match that and apply a 10% tariff against that country’s goods, so the two are at parity. But the Trump administration plans to go beyond just existing tariffs in calculating reciprocal rates — it has said non-trade barriers, like value-added taxes, would also be included in the calculation.