As the dog days of August 2025 drag on, a new anxiety is quietly gripping the world’s financial centers: the specter of U.S. stagflation. That’s the toxic brew of sluggish economic growth mixed with stubbornly high inflation—a combination that hasn’t haunted the U.S. economy in earnest since the 1970s. But according to a recent poll by BofA Global Research, a whopping 70% of global investors now expect stagflation to hit the United States within the next 12 months. That’s not just a handful of worried traders; it’s a broad cross-section of the world’s financial elite, as reported by Reuters and Cryptopolitan.
What’s fueling these fears? The evidence, say market watchers, is stacking up. Early August brought a trio of troubling data points: weakness in the U.S. labor market, a sharp uptick in core inflation, and an unexpected jump in producer prices. Each of these could be shrugged off in isolation, but together they paint a picture that’s hard to ignore. As Paul Eitelman of Russell Investments—an asset manager overseeing more than $1 trillion—put it, “If we had another very weak employment report, that would significantly ramp up (U.S. stagflation) concerns.”
Yet, in a twist that seems almost paradoxical, the world’s stock markets remain buoyant. U.S. equities are still hovering near all-time highs, and bond markets are—at least on the surface—remarkably calm. Carmignac fixed income manager Marie-Anne Allier summed up the strange mood: “Stagflation is in the mind of the market, but not the price.” It’s as if investors are whistling past the graveyard, aware of the risks but not yet willing to price them in.
Dig a little deeper, though, and the cracks begin to show. Persistent inflation is already taking a bite out of longer-dated bonds. When inflation sticks around, the fixed interest payments from these bonds lose real value over time—a painful prospect for pension funds and insurers. “Pensions and insurers are increasingly uneasy about how inflation could hit their bond holdings,” Eitelman told Reuters. And don’t expect foreign bonds to offer much of a safe haven. As Mayank Markanday of Foresight Group explained, “Interest rates and the long end of the bond curve are highly correlated between the G7 economies. If you see a big selloff in the long end of the U.S. curve, we are likely to see impact on some of the others.”
The numbers back this up. In 2025, there’s already been a notable selloff in long-dated bonds across major markets. While two-year yields have fallen in the U.S., Germany, and Britain, 30-year yields are actually higher—a sign that investors are demanding more compensation for the risk of future inflation. If inflation remains sticky and the Federal Reserve is forced to keep interest rates high, even short-term bonds could come under pressure.
Meanwhile, some investors are taking out insurance on the stock market. Caroline Shaw, a multi-asset manager at Fidelity International, said her team expects U.S. growth to slow and has identified stagflation as one of their two core scenarios. While she remains upbeat on U.S. tech giants, Shaw revealed that in mid-July, Fidelity bought put options on the Russell 2000 small-cap index—a move designed to profit if smaller, more cyclical stocks take a tumble.
History, too, offers a sobering lesson. According to Michael Metcalfe, State Street’s head of macro strategy, world stocks have dropped by an average of 15% since 1990 whenever U.S. manufacturing data signaled both contraction and rising prices. That’s not a blip; that’s a real hit to global portfolios. Still, for now, shares keep rising. Metcalfe thinks investors are betting that “the disruption to the global trading system isn’t going to disrupt big tech earnings.” It’s a gamble, and one that Kristina Hooper, chief market strategist at Man Group, likens to selective parenting: “It’s like parenting, you only want to see the best in your children, and we’re at a stage where it’s possible for markets to do that.”
The currency markets are telling a different story. Nabil Milali, multi-asset and overlay portfolio manager at Edmond de Rothschild Asset Management, sees signs of stagflation in the U.S. data and expects the dollar to weaken further against the euro. That’s already happening: the euro has gained more than 12% against the dollar so far in 2025, and other major currencies like the Japanese yen and British pound have also strengthened. Stagflation, after all, is a double whammy for the greenback—slower growth tends to weaken a currency, while high inflation erodes its purchasing power abroad.
So where are investors turning for safety? Gold, for one, is back in vogue. “Stagflation could offer one more reason to add gold, already a common refuge for investors,” Hooper told Cryptopolitan. Short-dated inflation-linked bonds are also drawing attention, as they offer some protection against rising prices. Markanday notes that these assets are particularly attractive in today’s environment. And for the professionals, there are even more sophisticated tools: inflation swaps, which rise in value when price indexes exceed a set threshold. The U.S. two-year inflation-linked swap is now near its highest point in over two years, signaling that many are hedging against the risk of persistent inflation.
Despite all this, there’s a sense of suspended disbelief in the markets. Stocks are still near record highs, and the broader financial system seems unfazed—at least for now. But as the data continues to roll in, and as more investors brace for the possibility of stagflation, the mood could shift quickly. The experience of the past—when world stocks slumped and currencies swung wildly in response to U.S. economic malaise—serves as a warning. For now, though, the world is watching, waiting, and, in some corners, quietly preparing for the storm that may lie ahead.
As summer wanes, the tension between optimism and caution is palpable. Investors, policymakers, and ordinary savers alike will be keeping a close eye on the next round of economic data. Whether the markets’ current calm is justified—or merely the calm before the storm—remains to be seen.