STAGFLATION 2025
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1. WHEN GROWTH AND INFLATION MOVE IN OPPOSITE DIRECTIONS
The market in 2025 is at a crossroads full of contradictions.
In June 2025, inflation in the U.S. rose to 2.7%, slightly up from May, but has decreased significantly from the period of 2022 at 9%, which was just after the COVID pandemic. The economy is moving in the opposite direction: GDP in Q1/2025 decreased by 0.5%, with the full year only expected to grow by 1.4% - the lowest in 10 years, excluding the pandemic. In Europe, the situation is no better.
This combination is characterized by persistent inflation, slowing growth. This is bringing financial markets and the economy back to an old obsession: stagflation.
So have we really entered the stagflation cycle, and if so, how should investors prepare?
2. WHAT IS STAGFLATION? WHY IS IT DANGEROUS?
Stagflation is a state of 'both stagnation and inflation', usually accompanied by rising unemployment. A 'lose-lose' situation that ties the hands of both monetary and fiscal policies.
- Simply put, under normal circumstances, when inflation increases, commodity prices rise, and the market is active, people have many job opportunities, leading to a decrease in the unemployment rate. Conversely, when inflation decreases, the market stagnates, money is not pumped into the economy, leading to fewer jobs, thus increasing the unemployment rate. Generally, the unemployment rate and inflation tend to move inversely with each other.
- But stagflation is a state of stagnation, where the economy struggles to grow, everything is sluggish, people find it hard to do business, unemployment rates rise, yet commodity prices and inflation remain high. This leads to difficulties as both people's incomes and the economy decline, but prices remain high, making consumption challenging. This is a very difficult phenomenon to untangle.
It appeared in the 1970s in the U.S. with severe consequences: market collapse, double-digit unemployment rates, plummeting consumer confidence.
3. WHY WORRY ABOUT STAGFLATION RETURNING IN THE NEXT PHASE?
In 2025, the U.S. has not officially entered full stagflation (unemployment is only 4.1% in June 2025, stable compared to the previous year), but risks are rising due to negative growth in Q1 and inflation exceeding the FED's 2% target.
Clear signs:
- U.S. inflation is anchored high, difficult to bring back to the 2% target as expected by the FED.
- GDP was negative in Q1/2025, and the full year is only projected at 1.3-1.4%.
- Consumer confidence is decreasing, the labor market is beginning to weaken.
- Unemployment, although not yet rising sharply (4.1%), could rise to 5% by 2026.
The theory states that high inflation is usually accompanied by low unemployment (and vice versa). But if both high inflation and rising unemployment occur as is beginning to happen in 2025, it presents a paradoxical situation for traditional models.
4. ROOT CAUSES OF THE STAGFLATION RISK?
A. Supply shock
Like the 1970s with the oil shock, modern stagflation is also arising from external disruptions:
- Ongoing war in Ukraine and the Middle East.
- New tariffs from the Trump administration are increasing the prices of imported goods.
- Port strikes, disrupted maritime transport.
- Global supply chains are weakening due to climate change, AI is altering production structures.
All of this is driving up input costs. Causing inflation, but not helping GDP growth.
B. Wrong economic policies
- Excessive money printing during COVID.
- Unprecedented high budget deficit.
- The government continues to spend heavily while productivity does not increase correspondingly.
The CEO of JPMorgan once warned: 'If you let stimulus packages create money supply indiscriminately, combined with trade protectionism, you are inviting stagflation back.'
5. THE PRICE AND WAGE SPIRAL
Imagine: prices rise ⇒ workers demand higher wages ⇒ businesses raise prices to cover costs ⇒ inflation increases further.
This is the vicious cycle that prolonged inflation for over a decade in the 1970s.
In 2025, it remains a latent threat. If the unemployment rate rises, and productivity does not improve, this spiral could trigger again.
And currently, money is no longer tied to gold. Currency has become 'trust' and when the money supply increases excessively while trust does not keep pace, inflation will be the inevitable result.
In 2025, the consequences of stimulus packages worth thousands of billions of USD from 2020-2022 have still not been fully digested.
6. DIFFICULTIES IN FINDING SOLUTIONS
Raise interest rates? → Reduce inflation but push the economy into recession (as is happening in Q1/2025).
Lower interest rates? → Stimulate growth but make inflation hotter.
The FED is currently at a crossroads. They want to cut interest rates, but are afraid of making the market too exuberant.
Possible feasible solutions:
- Tax cuts to reduce supply shocks.
- Increase technology investment (AI) to improve productivity.
- Immigration reform to reduce long-term labor costs.
Some past solutions:
- In 1979, Paul Volcker raised interest rates to 20%. The U.S. economy fell into recession, but stagflation then ended. Ready to accept the pain of a market collapse for a period.
- Conversely, the predecessor Arthur Burns hesitated, prolonging a painful decade.
- The FED is currently at the crossroads, and half-hearted actions will be the biggest mistake.
7. IS THERE A RISK AT THE CURRENT TIME?
Signs include:
- Persistent high inflation (2.7%)
- GDP is declining
- Consumer confidence is low
- The labor market is starting to weaken
But it is not yet comprehensive:
- Unemployment remains stable (4.1%)
- Prolonged non-negative growth
- The U.S. is less dependent on oil than before
In other words: stagflation has not fully occurred yet, but it is knocking at the door.
8. VIETNAM'S SITUATION IN 2025?
- Strong growth: Q2 GDP increased by 7.96%, full-year target 8.5%, outperforming the region.
- Controlled inflation: Only 3.57% in June 2025.
But Vietnam is not outside the world:
- Import raw material prices are rising due to global supply shocks.
- U.S.-China tariffs affecting exports
- Disrupted supply chains can easily create inflationary pressure.
In general, you all have done very well already!
8. CONCLUSION
The economy is not a formula of 1+1=2. It is a combination of science - data - emotions - human behavior.
No one can accurately predict stagflation. But all signs indicate: we are nearing it.
The question is no longer: 'Is there stagflation?'
But rather: 'How will we, investors, the government, and businesses react if it happens?' Alden will share this in a later article! This one has already been long! Thank you for reading this far!
