US Economy Flirts with Stagflation as Fed Hikes Interest Rates
The US economy is facing a potential stagflation scenario in 2026. According to the definition of stagflation, it requires a combination of accelerating prices, stalling output, and rising joblessness, along with a failure of the wage-setting process and long-run expectations. In September 2026, data was run against this definition, condition by condition.
The US met two of the seven conditions: headline inflation is above target and rising, and there has been an adverse energy supply shock due to high oil prices. However, unemployment is still low at 4.1%, real GDP has not printed a negative quarter since early 2025, and the 10-year breakeven inflation rate implied by the Treasury's curves closed at 2.33%, a hair below its average from a year ago.
The Federal Reserve raised interest rates in September, citing a strong economy with an inflation problem. The projections behind the vote also upgraded growth to 2.3% and marked down unemployment to 4.1%. This suggests that the Fed is treating the two as separable issues, rather than a demand collapse.