Stagflation, the unwelcome mix of slowing growth and rising prices, is a rare economic phenomenon. It runs against the usual cycle where a downturn cools inflation. When it does occur, it is often the result of an unusual blend of fiscal, monetary, and supply-side shocks that override this natural adjustment. Dr Komal Sri-Kumar, president of Sri-Kumar Global Strategies, notes that the United States last experienced it in the 1970s, when heavy spending, loose money, and an oil shock combined to stall growth while driving up costs.
Dr Komal Sri-Kumar believes the current policy environment is starting to resemble that earlier episode. Large deficits, political pressure on the Federal Reserve to cut rates, and trade-related supply pressures, he says, are creating conditions where slower growth may not bring the usual relief on inflation. The result could be a policy trap in which tackling one problem only worsens the other.
He points to history for a warning. During the Vietnam War, fiscal strains pushed Washington into sustained deficits. Under pressure from President Richard Nixon, Fed Chair Arthur Burns lowered rates through 1970 and 1971 while the money supply expanded. The oil price shock of 1973 compounded the problem, but Sri-Kumar argues that the seeds of inflation had already been sown by loose policy and the loss of purchasing power for oil producers, which prompted them to raise prices further.
Fast-forward to today, and the fiscal side is again under stress. Pandemic-era stimulus, tax cuts, and industrial subsidies have kept borrowing needs high. The recently passed Big Beautiful Bill will push deficits higher still without a credible plan to stabilise debt. On the monetary side, the long stretch of near-zero interest rates and asset purchases during 2020–2022 left the economy awash with liquidity. The Fed has since tightened policy, but pressure from the White House to ease has been growing.
Those prospects increased last week when President Donald Trump nominated Stephen Miran, chair of the White House Council of Economic Advisors, to fill a vacant Fed Board seat. If confirmed, Miran would serve until January 2026 and is expected to favour rate cuts. His proposals, dubbed the “Mar a Lago Accord”, include measures to weaken the dollar through coordination with trading partners and a “user fee” on foreign holders of US Treasurys. Sri-Kumar warns these could trigger a rapid depreciation of the currency, add to inflationary pressures, and push Treasury yields higher.
Miran’s arrival would add to the dissent already seen inside the Fed. At the July meeting, Governors Christopher Waller and Michelle Bowman both voted for immediate rate cuts. If Miran joins them in October, assuming Senate confirmation by then, Sri-Kumar expects three dissents to add visible strain to the FOMC’s public stance, even as inflationary pressures rise from tariffs imposed since April’s “Liberation Day”. Chair Jerome Powell has said he will remain in post until his term ends in May 2026.
The parallels to the 1970s, Sri-Kumar argues, are clear: expansionary fiscal policy, political demands for looser money, and external supply shocks. This combination risks locking policymakers between inflation and recession, with neither problem yielding easily to standard remedies. For investors, that could mean higher long-term yields, a weaker dollar, and a more fragile economy. Recent weak demand at 10- and 30-year Treasury auctions, alongside rising yields, may be an early sign of that shift.
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