Lately, there’s been a lot of chatter in the media about stagflation — an economic term that sparks concern. But what exactly is stagflation, and why does it cause so much worry? 

Balancing GDP, inflation, and interest rates

In a healthy economy, there is a balance between gross domestic product (GDP), inflation, and interest rates. To help explain, let’s use an analogy we think everyone can relate to: an airplane during takeoff: 

  • GDP generates the economy’s lift through growth, like the wind over an airplane’s wings.
  • Inflation is the angle of attack, like the upward tilt of the aircraft as it climbs. 
  • Interest rates provide thrust or power, similar to engines.

During takeoff, a pilot must carefully balance lift, tilt, and thrust. Increasing the angle of attack (inflation) without enough speed (GDP) can cause the plane to stall. Cutting the engines (interest rates) to reduce the angle might make you lose too much airspeed, also resulting in a stall. And pushing the engines harder to gain lift can tilt the plane up too far, triggering yet another stall scenario. 

Just as a successful takeoff involves a delicate dance between competing systems, our central banks must find the right balance between GDP, inflation, and interest rates as they manage the economy. But when their strategies fail, the economy responds unfavorably. For example, stagflation is an indicator that the economy is stalling.

Stagflation, inflation, deflation: what’s the difference? 

Stagflation is the combination of the terms “stagnation” and “inflation.”1 It occurs when growth slows, inflation remains high, and unemployment rises. But stagflation indicators are different than inflation and deflation, as illustrated in the infographic below:

Stagflation is concerning because there’s no easy fix. In fact, it creates a policy dilemma: if the Fed raises interest rates to fight inflation, that can further suppress growth. But if the Fed lowers rates to stimulate the economy, inflation may spiral higher. 

This dilemma is why the markets and economists pay close attention whenever talks of stagflation begin to surface. 

Are we heading toward stagflation?

Despite the headlines, the Potentia Wealth team of advisors does not see an immediate stagflation threat. Here’s why: 

  • Inflation is stabilizing. Thought it’s not back to pre-pandemic levels, core inflation has cooled significantly since its peak.
  • The labor market remains strong, with job openings exceeding expectations and unemployment decreasing.
  • The broader market showed resiliency following the short-term volatility created by recent tariffs, currently, it remains supported by strong fundamentals and steady consumer demand.

GDP growth has slowed modestly, as illustrated in the “Real GDP” chart, but it’s not alarming.2 The “Components of GDP” chart suggests there are sufficient factors to keep the economy aloft.2

Disciplined decisions: moving from defense to offense

As we began 2025, we anticipated elevated uncertainty and proactively adjusted allocation to reduce risk — while remaining ready to re-enter the market when the data and our discipline allowed. While the first quarter data required us to defensively lean on our de-risking framework, the second quarter data allowed us to go on offense and apply our re-risking process.

Let’s take a look at how our disciplined policies guided the second quarter:

  • Equities: In alignment with our re-risking policy, we re-entered the market 30 days after Liberation Day. We identified opportunities in the developed international sector and emerging markets, both of which offered attractive valuations and potential tailwinds from tariffs. We also re-established our position in the AI-focused technology fund, JTEK. We also reduced our exposure to Berkshire Hathaway ahead of Warren Buffett’s upcoming retirement — a proactive step in managing single-company concentration and leadership risk.
  • Fixed income: We continue to focus on lessening duration and improving credit. Because yields can change drastically during times of economic uncertainty, we shifted from intermediate-duration municipal bonds into short-duration municipal bonds to shield the portfolio from volatility. The move maintains tax-efficiency while improving stability and predictability — priorities in today’s uncertain economic market.  

Helping you navigate the noise around stagflation

The economy is in a transition phase, adjusting to higher rates and shifting global trade conditions. That can feel bumpy at times, but it’s not cause for alarm. Our approach remains grounded in data, diversification, and long-term strategy. While we continue to closely monitor inflation, employment, and interest rate policy, we’re moving forward. We believe the current trajectory remains sustainable for now — if not spectacular.

As always, if you have questions or want to discuss how current market dynamics affect your financial plan, we’re here to help. Regardless of whether we’re facing predictable or uncertain market conditions, one thing doesn’t change — we’re ready to partner with you and guide you through whatever conditions prevail.

  1. Visual Capitalist, “A Visual Guide to Stagflation, Inflation, and Deflation,” Advisor Visual Capitalist, 2023, https://advisor.visualcapitalist.com/visual-guide-to-stagflation-inflation-and-deflation/?utm_source=chatgpt.com.
  2. J.P. Morgan Asset Management, Guide to the Markets — U.S., 2025, Page 17 “Economic Growth and the Composition of GDP” https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/.

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