Economist Warns of First Stagflation Crisis in 50 Years Amidst Tariffs and Fed Concerns

Prominent economist Komal Sri-Kumar, President of Sri-Kumar Global Strategies, has issued a stark warning that the global economy is "moving toward a stagflation situation," a crisis not seen in five decades. His comments, shared by Squawk Box on social media, highlight a concerning confluence of comprehensive tariffs and Federal Reserve policy decisions. This economic scenario is characterized by simultaneous high inflation, stagnant economic growth, and elevated unemployment.

Stagflation, a portmanteau of stagnation and inflation, presents a unique challenge to policymakers because traditional tools to combat one aspect often exacerbate the other. Sri-Kumar emphasized that the current economic environment, particularly the imposition of significant new tariffs, is a primary driver of this looming threat. He noted that average tariff levels have risen considerably, from approximately 2% to around 18%, causing widespread cost increases across supply chains.

These tariffs, according to Sri-Kumar, act as a supply shock, making goods more expensive and hindering economic growth by reducing demand and investment. He also expressed concern over the Federal Reserve's potential actions, particularly any inclination to cut interest rates. Such moves, he argued, would worsen the inflation outlook, especially as the full impact of tariffs is yet to be realized.

Drawing parallels to the 1970s, the last major period of stagflation, Sri-Kumar explained that current conditions mirror the past, where external shocks (like the 1970s oil crisis) combined with accommodating monetary policies led to prolonged economic hardship. He highlighted that while the labor market currently shows low unemployment, this is potentially misleading due to restricted labor supply, which could further fuel inflationary pressures.

The economist's warning comes as global economic growth is projected to slow, with some experts anticipating a recession in 2025. For investors, stagflation typically means a challenging environment where both stocks and long-term bonds can suffer. Historically, assets like gold and certain commodities have shown resilience during such periods, as they tend to maintain value amidst rising prices and economic uncertainty.