An Early Look At Stagflationary Pressures

By Dr. Duru of Inflation Watch

Saturday, April 19, 2025 5:19 AM EDT

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The Federal Reserve Bank of Philadelphia’s April 2025 Manufacturing Business Outlook Survey provided an early look at what a stagflationary period for the economy could look like with massive tariffs burdening the global economy. This measure of manufacturing activity in New Jersey, Pennsylvania, and Delaware showed a sharp plunge in business alongside a sharp rise in pricing pressures. The measure of future activity plunged in March, ending an impressive recovery and uptrend from the 2022 trough, and presaged April’s plunge in manufacturing activity. Current activity dropped to levels last seen in April 2023 and suffered its largest one day decline since the pandemic. According to the survey, “new orders also fell sharply…its lowest reading since April 2020.”

Source: April 2025 Manufacturing Business Outlook Survey, Federal Reserve Bank Philadelphia

At the same time economic activity fell off a cliff, prices paid accelerated higher. A steady uptrend in prices paid was in place since last year, but in April they jumped to levels last seen in July, 2022. After spiking in January, the prices received flattened out. So the good news, for now, is that firms in aggregate are not passing along the surge in prices paid. Either firms are facing the reality of a loss in pricing power in a softening economic environment, and/or they are trying to wait out the current economic chaos. Either way, the underlying stagflationary pressures are roiling just under the surface for the manufacturing sector.

Note that since these measures are diffusion indices (see definition in the above chart), the magnitude of these effects is not visible. Still, given policymakers closely watch these economic surveys to inform policy, the stagflationary signals are sure to bleed out into monetary policy.

The Fed Trap

Based on the speeches from members of the Federal Reserve, the stagflationary signals are already bleeding into monetary policy. For example, concerns about stagflation appeared in Fed Chair Jerome Powell’s answers to questions in an interview at the Economic Club of Chicago last week.

“the administration…is implementing significant policy changes and particularly trade now is the focus and the effects of that are likely to move us away from our goals. So unemployment is likely to go up as the economy slows in all likelihood and inflation is likely to go up as tariffs find their way and some part of those tariffs come to be paid by the public. So that’s the strong likelihood…”

This economic bind has the Fed trapped between inflation and economic weakness. For now, all the Fed can do is hope for the best. Hope as monetary policy came through as Powell continued: “…my hope is that we’ll get through this and get back…we’ll be moving away from those goals [of maximum employment and price stability] probably for the balance of this year and then or at least not making any progress and then we’ll resume that progress as we can.”

The Fed is clearly not thinking about responding to the current economic chaos with price cuts. Powell insisted that “our role is to make sure that this will be a one-time increase in prices and not something that turns into an ongoing inflation process.” The Fed cannot contain higher prices and higher inflation expectations with rate cuts. Thus, the Fed will likely sit on its hands as long as possible in the face of weakening employment. I expect the Fed to resort to creative “Fedspeak” in lieu of action in the hopes stagflationary pressures will wind down on their own.

A GTIP Dip

Three weeks ago I made the case for buying the Goldman Sachs Access Inflation Protected USD Bond ETF (GTIP) as one way of meeting the investing challenge of a stagflationary environment. GTIP fell soon after that as long-term bond yields suddenly soared with waning confidence in the U.S. economy and the U.S. dollar. I used this period to accumulate GTIP at lower prices since I do not foresee long-term yields going much higher absent an extreme crisis of confidence. GTIP will get its next big test when April’s CPI rolls out next month. Will it demonstrate businesses restraining from passing along tariffs to end consumers? Will it warn of resurgent inflationary pressures? The Federal Reserve Bank of Philadelphia’s April 2025 Manufacturing Business Outlook Survey suggests GTIP has tailwinds.

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