Stagflation, the unwelcome mix of slowing growth and rising prices, is beginning to surface in the United States. Data for August showed consumer prices rising 0.4% month-on-month and 2.9% year-on-year, the highest annual reading since January. Core inflation, excluding food and energy, reached 3.1% on the year, well above the Federal Reserve’s 2% target. Shelter costs reaccelerated, food at home rose sharply, and airfares spiked. Gasoline was up nearly 2% on the month. This is broader than earlier inflation pressures and harder to dismiss as a blip.
Tariffs are amplifying the trend. Firms had initially relied on pre-tariff inventories to buffer costs, but that cushion has now run out. August’s inflation uptick was tied by many analysts to tariff pass-throughs finally reaching store shelves, with more expected as further rounds phase in.
At the same time, the labour market is cooling. Nonfarm payrolls grew by just 22,000 in August, while the unemployment rate rose to 4.3%, its highest level in nearly four years. Wage growth slowed to 0.3% month-on-month, or 3.7% annually. A Bureau of Labor Statistics revision showed that nearly a million fewer jobs were created from April 2024 to March 2025 than originally reported. Initial jobless claims have climbed to their highest level since 2021, signalling weakening demand for labour and rising layoff risks.
“This is a classic case of early-stage stagflation,” said Dr Komal Sri-Kumar, president of Sri-Kumar Global Strategies, a California-based firm advising sovereign wealth funds and multinational investors on risk. “We now have softer growth signals and a re-acceleration in prices, simultaneously.”
Sri-Kumar argues that two policy shocks are working in tandem: trade barriers pushing costs higher, and labour supply frictions from tighter immigration enforcement and expanded verification mandates, particularly in industries reliant on migrant workers. Combined with delayed hiring and weaker capital spending, the result is a mix of sluggish real growth and sticky inflation.
Markets, however, are betting on relief. A 25-basis-point cut in the Federal Funds rate is fully priced for next week’s Federal Open Market Committee meeting, with investors citing labour market weakness. Sri-Kumar warned that this risks entrenching inflation. “Cut rates despite rising inflation and you risk making it stick; hold or tighten and you risk a sharper slowdown and political backlash.”
For bond investors, stagflation typically steepens the yield curve, with near-term policy hopes anchoring the front end while long-term risk premia rise. A near-term cut could first flatten borrowing costs, but persistent inflation would likely push long-dated yields higher. The dollar would face downward pressure, while gold, already strong this year, could rise further as a hedge against both inflation and institutional uncertainty.
Sri-Kumar added that this is not simply statistical noise. “The bottom line is that we no longer have just a whiff. We have the first signs of stagflation. The Fed faces a genuine quandary: ease to cushion jobs and risk hotter inflation, or hold and risk a harder landing.” Without a sudden reversal in tariff policy or an unexpected rebound in labour supply, he said, the stagflationary drift is likely to intensify into the autumn.
Quotes in this article are drawn from Dr Komal Sri-Kumar’s weekly newsletter, SriKonomics. Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risks and opportunities. Dr Sri-Kumar is regularly featured on business media and speaks in global financial centres on major economic and geopolitical issues.
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