The portmanteau “ stagflation ” is one that many people are vaguely familiar with as a concept, even if few can remember what it was like to live in that kind of environment. It has been about 50 years since we had stagflation in North America. To refresh your recollection, the generally accepted definition is that

the economy experiences stagnant growth, high unemployment and high inflation simultaneously. Until the 1970s, it had been thought that these outcomes were mutually exclusive.

Back then, oil price shocks slowed the economy and raised prices to create a perfect storm of discomfort. In 2026, the impact of tariffs — the worst of which was postponed due to the stockpiling of inventories — could cause both higher prices and fewer jobs. When we experienced stagflation in the 1970s, it was due to outside shocks. Today, the likelihood of a similar fate might be due to an “own goal” caused by the economic warfare of a mercantilist United States president who believes he has leverage over other nations by inflicting hardship on his own. Part of the gambit involves gaining external benefits before the internal costs become unbearable, in other words, before the November mid-term elections in the United States.

Let’s look at the signs and constraints. First, economic growth has slowed to a snail’s pace in Canada. The most recent report shows a drop in Canada’s GDP, indicating a slowdown in economic activity. While the U.S. data indicate that GDP rose over the third quarter, both countries face slowing immigration and an aging population. These will cause demographic headwinds that are only likely to get stronger.

Meanwhile, we must contend with declining business investment in Canada due to the uncertainty caused by President Donald Trump’s trade war.

The other bugaboo that has not fully materialized yet is high inflation. So far, consumer prices for many discretionary items have remained stable. But that’s more than can be said for groceries. The problem with food inflation is that people make regular purchases, so they see and feel the increases in real time.

The whole world became familiar with the concept of supply chain disruptions when COVID-19 hit. These days, the disruptions are caused by companies outsourcing suppliers to avoid punitive tariffs. Even if new suppliers can be sourced, which is not always possible, they often come with delays and quality control concessions. Ongoing supply chain issues will likely continue to drive prices up.

Next, we have to contend with the possibility of high unemployment rates . South of the border unemployment rates started rising but somehow Canada has so far avoided this fate. Nationalistic sentiments and government interventions are helpful, but they can only do so much. When the global economy slows due to macroeconomic factors that cannot be avoided, the impacts will be felt eventually.

Persistent unemployment levels, particularly in sectors hit hard by tariffs (steel, aluminum, automobiles) is likely to become the norm in places such as Sault Ste. Marie, Ont. In addition, some people may resort to taking whatever jobs they can get as the economy transitions and underemployment may be a new reality for people in the most affected industries. They may have to sacrifice to get by. Being employed in jobs that do not fully use skills contributes to both economic inefficiency and emotional precarity.

Taken together, these metrics may well lead to decreased consumer confidence. People might put off buying that new car. Surveys consistently indicate that when consumers are more pessimistic about the economy, discretionary spending is reduced. The possible combination of slow wage growth and higher than usual inflation leads to decreased purchasing power. Consumers are usually the hero of the story when there’s an economic rebound but so much of finding a way out of hard times rests on the belief that a way out is possible. Bad news begets caution and restraint, which in turn causes growth to be tenuous. Many workers may come to feel the pinch of rising costs without corresponding increases in pay.

Stagflation poses a unique problem for central banks . Given the dual mandate of supporting price stability and high employment, tough decisions will need to be made. By the time the world found its way out of recession in the early 1980s, people were furious. By necessity, central bankers made the problem worse as a precondition to things getting better. They raised bank rates to modern day highs in order to bring inflation to heel. Many people — as citizens, voters and investors — fail to appreciate that we have experienced a multigenerational bull market largely because rates went from the high teens in the very early 1980s to essentially zero a few years ago. Now that rates are normalizing and tailwinds become headwinds, the reality of a new world order is coming into focus.

Traditional monetary policy tools may be less effective in addressing stagflationary pressures because of political considerations. South of the border, we have a president who has been emphatic that he prefers an easy money approach. That, in turn, calls the independence of central bankers into question.

All told, stagflation poses a significant challenge for policymakers. Many people expected it to rear its head in 2025. Accordingly, some have come to conclude that the potential crisis has been averted. I hope they’re right, but I fear that the impacts are likely to be felt later than previously expected, but possibly sooner than people currently expect.

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John De Goey is a portfolio manager with Designed Securities Ltd., regulated by the Canadian Investment Regulatory Organization and a member of the Canadian Investor Protection Fund.