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Written By: Sam Garza, Joseph Mezyk, Fei He, CFA and Sunyu Wang | DoubleLine
"We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of ‘stagflation’ situation." — Iain Macleod, British MP who coined the term "stagflation" in a 1965 speech to Parliament
It's not often that consumers expect the economy to deliver both higher prices and fewer jobs—but that’s exactly what the latest University of Michigan (UMich) survey shows. Inflation expectations have jumped, and unemployment fears have surged to levels not seen since 2008. Together, these shifts suggest households are bracing for stagflation.
Consumer View of Tariffs
The sharp change in consumer expectations coincides with sweeping shifts in U.S. trade policy. The latest UMich survey doesn’t just reflect unease—it shows a significant acceleration in pessimism. A 47 reading on the unemployment expectations index marks the most negative outlook since the Global Financial Crisis. Inflation expectations have nearly doubled since last November, jumping from 2.6% to 5%—a move reminiscent of the early post-pandemic surge in 2022. Such rapid sentiment deterioration suggests that households are reacting not only to inflation fears, but also to growing uncertainty about jobs and policy direction.
One way to frame the discomfort consumers are signaling is through the Misery Index, which combines inflation and unemployment into a single number. The UMich data suggests that the trajectory of both components—rising prices and growing joblessness—points to the index soon climbing toward levels last seen during past crises.
A Leading Indicator?
Soft data such as surveys can be helpful as a leading indicator of hard data such as employment or GDP growth, which must be measured before being reported (and is therefore backward looking). Survey responses can also influence consumer behavior which in turn affects broader economic activity.
During the Global Financial Crisis, the unemployment expectations survey peaked in January 2007—11 months before a recession officially began. By the time it reached levels comparable to today, the economy was already six months into a downturn. Soft data like this can be valuable early warning signals for hard economic indicators such as employment and GDP, which are backward-looking and take time to confirm.
Hard economic data may soon follow the weakness seen in survey data. Signs of a deteriorating labor market are already emerging, with Challenger U.S. Job Cut Announcements spiking to over 275,000 in March compared to an average of 63,000 per month in 2024.
Effects of Stagflation
The costs of tariffs are borne by either consumers or producers. Consumers bear the cost through higher prices, while businesses absorb it through reduced profit margins or by cutting their own costs – often through layoffs, which can increase unemployment. This combination of higher prices and higher unemployment is reflected in the UMich survey. The Misery Index, though simple, captures the pain of this dual pressure and highlights how quickly sentiment and conditions can deteriorate when both inflation and unemployment rise in tandem.
Rebuilding supply chains and factories takes time—and confidence, which depends on policy stability. The abrupt shift in global trade ties has left many businesses hesitant to commit to long-term investments. Instead of onshoring, firms may choose to wait out the current administration. This caution is already reflected in sentiment data: the CEO Confidence Index recently fell to its lowest level in over a decade.
Deteriorating confidence among consumers and businesses risks triggering a feedback loop of retrenchment and recession. When both signal it’s time to hunker down, the investing landscape becomes far more challenging.
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