KPMG Warns of Stagflation as US Inflation Re-Accelerates Toward 4%

US consumer price inflation is tracking toward 4 percent on an annualised basis, up from 2.8 percent in January, driven by energy costs that have roughly doubled since the Iran war closed the Strait of Hormuz on March 3, according to the Bureau of Labor Statistics' latest weekly indicator data.

KPMG's chief economist, Diane Swonk, said in a note published Thursday that the US economy faces "the clearest stagflation risk in 50 years," citing the simultaneous presence of rising prices, slowing GDP growth and a labour market that added just 87,000 jobs in March — the weakest month since December 2024.

The OECD revised its global inflation forecast upward on Wednesday, projecting 4.2 percent for advanced economies in 2026, up from its January estimate of 2.9 percent. The revision cited energy supply disruption and the compounding effect of US tariffs on Chinese, European and Canadian imports.

The 1970s Parallel

Stagflation — the combination of stagnant economic growth and persistent inflation — defined the US economy from 1973 to 1982. The trigger then was an oil embargo by Arab OPEC members. The trigger now is a military blockade of the same waterway that carries 20 percent of global oil supply.

The parallels are not exact. The US produces far more domestic oil than it did in the 1970s — roughly 13.2 million barrels per day, according to the Energy Information Administration, making it the world's largest producer. But oil is priced globally. When Brent crude spot hits $141 a barrel, American drivers pay more regardless of where the oil was drilled.

Gasoline prices averaged $4.23 per gallon nationally in the first week of April, according to AAA, up from $3.12 in late February. Diesel, which moves freight, hit $5.87 per gallon — a 74 percent increase in five weeks.

Tariffs Stack on Top

The energy shock arrived into an economy already absorbing the cost of tariffs imposed in January and expanded in March. The effective US tariff rate on Chinese goods now exceeds 60 percent, according to calculations by the Peterson Institute for International Economics. Tariffs on European steel and aluminium, Canadian lumber and Mexican auto parts add a further layer.

"Each of these alone would be manageable," Swonk wrote. "Together, with the energy shock on top, you get a cost structure that firms cannot absorb and consumers cannot sustain."

The Federal Reserve held its benchmark rate at 4.5 percent in March, caught between inflation that argues for higher rates and a labour market that argues for lower ones. Fed Chair Jerome Powell said at the March press conference that the situation required "patience and careful observation," a phrase markets interpreted as paralysis. The S&P 500 has fallen 9.3 percent from its February high.

Who Gets Hit First

Low-income households spend a larger share of their budgets on fuel and food — the two categories rising fastest. The Bureau of Labor Statistics estimates that the bottom quintile of US earners spends 8.1 percent of after-tax income on transportation fuel, compared to 2.3 percent for the top quintile.

Food prices have risen 3.8 percent year-over-year through March, according to the USDA's Economic Research Service. The cost of bread, eggs and cooking oil — all sensitive to energy and fertiliser prices — rose faster, at 5 to 7 percent.

Trucking companies are passing fuel surcharges to shippers, who pass them to retailers, who pass them to consumers. Werner Enterprises, one of the largest US carriers, announced a 12 percent fuel surcharge increase effective April 1.

Turkey provides a preview of what sustained energy-driven inflation looks like. Turkish inflation hit 30.87 percent in March, according to TURKSTAT, compounded by the country's near-total dependence on imported energy and the lira's continued depreciation. Ankara said it was pursuing five alternative shipping routes to bypass Hormuz — a process that, even if successful, would take months.

Deep Recession as Exit

KPMG's note ended with a blunt assessment: "The historical resolution to stagflation was a deep, deliberate recession engineered by Paul Volcker's Fed in 1981-82. If the current trajectory holds, a similar reckoning may be the only exit."

That recession pushed unemployment to 10.8 percent.

The OECD's interim report was more measured but pointed in the same direction. "The risk of a hard landing has risen materially," it said. "Policy space is constrained. Central banks face an environment where their primary tools work against each other."

The next US CPI report, covering March in full, is scheduled for April 10. Energy futures suggest no relief before June.