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For the past few years, Americans have been told to watch inflation. More recently, the labor market has become another source of concern.
Now those two problems may be starting to collide.
The latest employment report from the Bureau of Labor Statistics showed that U.S. payrolls fell by 23,000 jobs in July 2026. Even more concerning, previously reported job growth for May and June was revised downward by a combined 103,000 jobs. Over the previous 12 months, payroll growth averaged just 34,000 jobs per month.
At the same time, inflation remains stubbornly above the Federal Reserve's target. The Consumer Price Index was 3.5% higher in June than a year earlier, while energy prices were up 15.7% and gasoline prices were up 26.7%.
Economic growth is slowing as well. Real GDP increased at an annualized rate of just 1.5% during the second quarter of 2026, down from 2.1% during the first quarter.
Put those trends together and an uncomfortable word begins appearing in economic conversations:
Stagflation.
The United States is not necessarily experiencing classic stagflation yet. Unemployment remains relatively low at 4.1%, and the economy is still growing. But the combination of persistent inflation, weakening job creation and slower economic growth deserves attention.
Because if inflation stays elevated while employment deteriorates, policymakers could face one of the most difficult economic problems to solve.
What Is Stagflation?
Stagflation is essentially the combination of three conditions that normally aren't supposed to occur together:
- High or persistent inflation
- Weak or stagnant economic growth
- Rising unemployment or deteriorating labor conditions
Ordinarily, inflation tends to appear when an economy is running hot. Consumers are spending, businesses are hiring and demand exceeds the economy's ability to supply goods and services.
A recession usually produces the opposite conditions. Spending slows, unemployment rises and inflationary pressures tend to ease.
Stagflation breaks that relationship.
Prices continue rising even though economic activity is weakening.
That creates a painful situation for households. Someone who loses a job during a normal recession may at least benefit from falling gasoline prices, cheaper goods or lower interest rates.
During stagflation, that same person could lose a job while continuing to pay more for food, electricity, insurance and other necessities.
Are We Seeing the Beginning of Stagflation?
It is too early to make that declaration.
But several warning signs are worth watching.
The July jobs report was particularly notable. Payroll employment declined by 23,000, while the unemployment rate remained at 4.1%. Labor-force participation stood at 61.4%, down 0.7 percentage point since January.
Meanwhile, the employment-to-population ratio has declined by half a percentage point since the beginning of the year.
Some industries are already experiencing meaningful job losses. Financial-sector employment has fallen by 121,000 positions since its recent peak in May 2025. Retail trade lost another 19,000 jobs in July.
Wage growth also appears to be losing ground against inflation. Average hourly earnings were 3.2% higher than a year earlier in July, while the most recent CPI reading showed annual inflation running at 3.5%.
That does not mean every American worker is losing purchasing power. CPI and wage statistics measure different things and apply differently across households. But it illustrates the basic problem: prices can keep climbing even as the labor market loses momentum.
Meanwhile, the Federal Reserve acknowledged after its July meeting that inflation remains elevated relative to its 2% target. The Fed held its target rate at 3.5% to 3.75%, while three policymakers actually preferred another quarter-point rate increase.
That disagreement illustrates exactly why stagflation is so difficult for central banks.
Related: Why Wall Street Is Buying Gold
The Federal Reserve's Stagflation Problem
When inflation is too high, the conventional response is straightforward: raise interest rates.
Higher borrowing costs discourage spending and investment, reducing demand and eventually helping inflation cool.
When unemployment is rising and the economy is weakening, the typical response is the opposite: lower interest rates.
Cheaper credit can encourage borrowing, investment and hiring.
But what happens when inflation is too high and unemployment is rising?
The Fed cannot easily solve both problems simultaneously.
Raise rates aggressively and the central bank risks weakening the economy further.
Cut rates aggressively and it risks reigniting inflation.
Do nothing and both problems could potentially worsen.
That is the central dilemma of stagflation.
The situation becomes particularly difficult when inflation is being driven by supply-side forces rather than excessive consumer demand.
The Federal Reserve said in July that inflation remained elevated partly because of supply shocks affecting sectors including energy.
Higher interest rates cannot produce more oil, repair supply chains or make imported goods cheaper.
They can only reduce demand enough to offset some of those price pressures.
And reducing demand usually means slowing the economy further.
Why Stagflation Can Be So Painful for Households
Inflation alone reduces purchasing power.
A weakening labor market alone creates job insecurity.
Stagflation combines both.
Imagine a household that spends $70,000 per year. If its cost of living rises 4%, that household needs roughly another $2,800 annually just to maintain the same lifestyle.
That may be manageable when wages are increasing rapidly and employers are competing for workers.
It becomes much harder when raises disappear, hiring freezes spread or a household loses one of its incomes.
Essential expenses can also be particularly painful during inflationary periods because consumers cannot simply stop buying them.
The June CPI report showed food prices up 3% from a year earlier, electricity up 4% and gasoline up 26.7%.
Families can postpone a vacation or delay buying a television.
They cannot easily stop buying groceries, putting fuel in their cars or paying their electric bills.
Related: How to Convert a Portion of Your Savings Into Physical Gold and Silver
What Happens to Stocks During Stagflation?
Stagflation can create a difficult environment for the stock market.
Companies face pressure from both directions.
Their costs may rise because of higher wages, energy prices, transportation expenses and raw materials.
At the same time, consumers facing higher living expenses may reduce discretionary spending.
That can squeeze corporate profit margins.
Higher inflation can also keep interest rates elevated, which affects stock valuations. When relatively safe bonds and cash equivalents offer higher yields, people may become less willing to pay extremely high valuations for future corporate earnings.
Companies that depend heavily on cheap financing can face an additional problem. Refinancing debt becomes more expensive at exactly the time business conditions are weakening.
Not every company performs the same way, of course. Businesses with pricing power, strong balance sheets or exposure to commodities may fare differently.
But historically, stagflation has generally been a challenging environment for equities. Research compiled by the World Gold Council using data going back to 1973 found stagflationary periods were unfavorable for stock returns compared with several other economic environments.
What Happens to Bonds?
Bonds can also struggle when inflation remains high.
Suppose you own a bond paying 4% annually while inflation is running at 5%.
Your nominal return may be positive, but the purchasing power of that income is declining.
Inflation can also push market interest rates higher. When newly issued bonds begin offering better yields, existing lower-yielding bonds become less attractive and their market prices can fall.
That creates one of the unusual features of stagflation.
During a traditional recession, bonds often provide a counterweight to falling stocks because central banks cut interest rates.
During an inflationary slowdown, policymakers may not have that freedom.
That means stocks and bonds can potentially struggle at the same time.
What About Cash?
Cash provides stability and liquidity, which become especially valuable when jobs are less secure.
Having an emergency reserve may matter more during an economic slowdown than maximizing the return on every dollar.
But inflation creates a different problem.
If prices rise 4% while money sitting in cash earns 2%, purchasing power is still declining.
For that reason, stagflation forces savers to balance two competing needs: maintaining liquidity while protecting purchasing power.
There is no perfect solution.
Why Gold Gets Attention During Stagflation
Periods of persistent inflation and economic uncertainty often renew interest in gold.
Gold does not pay interest or dividends, and its price can be volatile. It should not be assumed that gold will rise simply because inflation increases during a particular month or year.
Its historical record during prolonged inflationary and stagflationary periods, however, is one reason some retirement savers choose to maintain exposure to precious metals.
World Gold Council research examining economic environments since 1973 found that gold historically performed particularly well during stagflationary periods compared with stocks and several other major asset categories.
There are several possible reasons.
Gold is a physical asset whose supply cannot be expanded by a central bank.
It is traded globally rather than depending entirely on the health of one country's economy.
It may also attract demand when confidence in currencies, government debt or financial markets deteriorates.
That does not make gold immune from price declines. But its behavior can differ considerably from traditional financial assets, which is why periods of inflation and economic uncertainty tend to revive the conversation around precious metals.
The 1970s Offer a Warning
For Americans old enough to remember the 1970s, stagflation is not an abstract economic theory.
The decade became synonymous with inflation, energy shocks, weak economic growth and rising unemployment.
It also demonstrated how difficult inflation can become to eliminate once businesses and households begin expecting prices to rise continuously.
Workers demand larger raises because they expect their cost of living to increase. Businesses raise prices because labor and materials cost more. Consumers may purchase goods sooner because they expect prices to be higher later.
Those behaviors can reinforce inflation.
Eventually, Federal Reserve Chairman Paul Volcker responded with extremely restrictive monetary policy beginning in 1979. Interest rates climbed dramatically, inflation ultimately came under control, but the economy endured painful recessions in the process.
Today's economy is not the economy of the 1970s.
The lesson, however, remains relevant.
Allowing persistent inflation to become entrenched can make eventually eliminating it far more painful.
Related: Devlyn Steele Discusses Debt, Inflation, and the Dying Dollar
What Could Make Today's Situation Worse?
Several developments could push the economy closer to a genuine stagflationary environment.
Energy Prices Remain Elevated
Energy affects far more than what drivers pay at the gas pump.
Higher oil and natural gas prices increase transportation, manufacturing, agricultural and shipping costs throughout the economy.
The latest CPI data already show energy prices rising significantly faster than overall inflation.
If those pressures persist, companies may continue passing higher costs to consumers even as economic growth slows.
Hiring Continues to Deteriorate
One negative payroll report does not establish a trend.
But the downward revisions to previous months make the July report harder to dismiss.
May payroll growth was revised from 129,000 jobs to just 63,000, while June was revised from 57,000 to 20,000. Combined employment for those two months was therefore 103,000 lower than previously reported.
Another several months of weak or negative payroll growth would make the labor-market side of the stagflation argument considerably stronger.
Inflation Refuses to Return to 2%
Headline CPI was running at 3.5% in June, although core CPI, which excludes food and energy, was lower at 2.6%.
That distinction matters.
If energy prices retreat and inflation falls with them, today's inflation spike could prove temporary.
But if inflation remains above the Fed's target even while employment weakens, policymakers will face increasingly difficult choices.
Economic Growth Slows Further
The economy is not currently in recession.
Real GDP still expanded at a 1.5% annualized rate during the second quarter.
But that was slower than the 2.1% rate recorded during the first quarter.
If growth falls toward zero while inflation remains elevated, the resemblance to stagflation becomes much stronger.
What Should Americans Watch Next?
No single statistic will tell us whether stagflation has arrived.
Instead, several indicators should be watched together.
The labor market is probably the most important. Continued payroll losses, rising layoffs, falling job openings or a sustained increase in unemployment would indicate that weakness is spreading.
Inflation is the second piece. The July CPI report, scheduled for release on August 12, will provide another important data point.
Economic growth completes the picture. If GDP continues slowing while prices remain elevated and hiring deteriorates, stagflation will become harder to dismiss.
Federal Reserve policy will also be revealing.
The Fed's next moves will show whether policymakers believe inflation remains the larger threat or whether deterioration in employment has become serious enough to justify lower interest rates.
The Bigger Risk May Be Having No Easy Way Out
A normal recession is painful, but policymakers generally know how to respond.
Cut interest rates. Increase liquidity. Encourage lending. Support economic activity.
High inflation also has a recognizable prescription.
Tighten monetary policy. Reduce demand. Keep rates restrictive until price pressures subside.
Stagflation is different because the cure for one problem can aggravate the other.
That is why today's combination of weaker employment numbers and persistent inflation deserves attention even if the United States has not yet entered textbook stagflation.
July's loss of 23,000 payroll jobs does not mean the labor market is collapsing. A 4.1% unemployment rate is hardly a crisis.
Likewise, 3.5% inflation is nowhere close to the double-digit rates experienced during the worst years of the 1970s.
But direction matters.
If inflation remains stubbornly above the Fed's target while job creation continues deteriorating and economic growth slows further, policymakers may find themselves confronting a problem the United States has not seriously faced in decades:
Prices that refuse to come down even as the economy runs out of jobs.
