Stagflation is coming for the first time in 50 years!

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As President Donald Trump's tariffs take effect, fears are growing that the US economy is headed toward an outcome which is widely considered to be worse than a recession.

Economists are becoming increasingly concerned that 'stagflation' could be rearing its ugly head for the first time in 50 years.

Stagflation is the combination of economic stag-nation and in-flation. Prices continue to soar at the same time as economic growth slows and unemployment rises.

Economists consider stagflation, which was last seen in the US in the 1970s, to be worse than a recession.

In a recession, unemployment goes up and the economy shrinks - but the silver lining is that there is little or no inflation.

The dual threat of higher prices as a result of tariffs, as well as multiple indicators which are pointing to a pullback in economic activity, are causing angst among consumers, business leaders and policymakers, CNBC reported.

On Tuesday, Wall Street fell in the red as a trade war between the US and its top trading partners rattled investors.

'Directionally, it is stagflation,' Mark Zandi, chief economist at Moody's Analytics, told CNBC. 'It's higher inflation and weaker economic growth that is the result of policy - tariff policy and immigration policy.'

The dreaded phenomenon has primarily manifested itself in 'soft' economic data and sentiment surveys in recent weeks, the outlet reported.

Among consumers, long-term inflation expectations are at their highest level in almost 30 years.

The annual rate of inflation rose to 3 percent in the year to January - higher than the Federal Reserve's 2 percent target.

Consumer spending also fell in January by the most in almost four years, despite incomes rising.

On Monday, manufacturing data showed that factory activity barely expanded last month, while new orders fell by the most in nearly five years.

This prompted the Atlanta Federal Reserve to project GDP to shrink by 2.8 percent in the first quarter of 2025.

If this holds up, it would mark the first time economic growth has decreased since 2022, and the worst plunge since the first Covid-19 shutdown in early 2020.

'Inflation expectations are up. People are nervous and uncertain about growth,' Zandi told CNBC.

'Directionally, we're moving toward stagflation, but we're not going to get anywhere close to the stagflation we had in the '70s and the '80s because the Fed won't allow it.'

Currently, markets are pricing in a 50 percent chance the Fed will cut interest rates starting in June, according to the CME Fedwatch tool.

But Zandi thinks there is a chance the central bank will raise rates to curb inflation.

This volatility is sparking a sell-off on Wall Street, with stocks erasing much of the gains made since Trump won the presidential election in November.

The Dow Jones Industrial Average dropped 1.5 percent by the end of trading on Tuesday, building on Monday's plunge.

The S&P 500 fell 1.2 percent, while the tech-heavy Nasdaq shed 0.3 percent. The Nasdaq flirted with correction territory during the session, which is when an index falls 10 percent from a recent high.

But some economists are warning now is not the time to panic.

Mark Hackett, chief market strategist at Nationwide, told CNBC: 'At this point, I'm still in the camp that this is a healthy resetting of expectations.'

He did admit, however, that stagflation 'certainly is something to pay attention to now, more than it's been in a while.'

Trump has long argued that tariffs will increase national revenue and galvanize domestic manufacturing.
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