Economists are worried about stagflation: What does that mean for consumers?

Over the next few weeks, you may hear economists talk about “stagflation.” What is it, and how would it affect consumers?

Normally, when there is inflation, the economy is growing so consumers earn more and the higher prices don’t hurt as much. In a recession, when the economy is not growing, prices stay relatively stable and may even go down.

But on rare occasions, prices rise while the economy slows – for economists, the worst of conditions called stagflation. The economy is stagnant but prices continue to rise.

It’s happened before. In the early 1970s, OPEC cut off oil shipments to the U.S. in retaliation for America’s support of Israel. Overnight, the price of gasoline went from 35 cents a gallon to around 60 cents.

Not only did that affect consumers’ pocketbooks, but it increased costs for businesses, which passed along those costs to consumers in the form of higher prices. When consumers and businesses had to spend more money for fuel they had less to spend on other things and the economy slowed.

Deva vu?

Some economists are worried that tariffs on a wide range of goods will have a similar effect, delivering a shock to the economy. The tariffs will raise prices for most imported products, which could slow the economy if consumers buy less.

For consumers hoping inflation will fade away, prices on many items could continue to rise. While in the 1970s the higher cost of energy spread throughout the entire economy, this time could be different – the higher costs could be limited only to imported products, assuming U.S. producers keep their prices stable.

There are other ways consumers could suffer. In a slowing economy, it may be harder to find a job and there are already signs that is happening. This week the Bureau of Labor Statistics reported job openings in February were near a four-year low. In a stagflation environment, pay raises may be harder to achieve.

Consumers already seem to be worried about the economy. In March, both The Conference Board’s Consumer Confidence Index and the University of Michigan Consumer Sentiment Index recorded sharp declines.