The potential return of stagflation, which would pressure a range of assets, has been flagged periodically over the past 50 years but not materialized as a real threat to investor portfolios. While economists and portfolio managers are not ready to say that this time is different, the dreaded scenario has crept back as a key risk for investors in recent weeks, as the prospect of trade wars and punitive tariffs cast a shadow over U.S. growth.

"Stagflation has definitely re-emerged as a possibility because we have these policies that could hurt consumer demand even while persistent inflation limits the Federal Reserve's ability to maneuver," said Jack McIntyre, portfolio manager for Brandywine Global's fixed income strategies. "It's not a zero-possibility scenario any more, by a long shot."

A key piece of the stagflation puzzle - inflation that refuses to cool down - lodged more firmly into place earlier this month, when government data showed consumer prices rose in January at their fastest monthly pace since August 2023, bringing the annual rate of inflation to 3%.

The other piece of the puzzle, U.S. economic growth, hangs in the balance, with Trump's tariffs threatening to add inflationary pressure that could tip the scale.

"What continues to concern us more than the risk of inflation is stagflation," said Tim Urbanowicz, chief investment strategist at Innovator Capital Management. "There is that sticky base of inflation to contend with but on top of that, tariffs have the potential to slow down the economy by becoming a tax on consumers and weighing on profits and economic growth."

A Bank of America survey of global fund managers on Tuesday showed the proportion of investors expecting stagflation - defined by the bank as below-trend growth and above-trend inflation - over the next year stood at a seven-month high. At the same time, investors remained bullish on stocks, with a trade war seen as a low-probability risk, the survey showed.

While Trump postponed imposing new tariffs on imports from Canada and Mexico for a month at the beginning of February, he has rolled out a new 10% levy on all Chinese imports and announced tariffs on global steel and aluminum imports.

He has also tasked his economics team with devising plans for reciprocal tariffs on every country that taxes U.S. imports, and this week said he plans to introduce 25% tariffs on autos, semiconductors and pharmaceutical imports.

Some investors believe any hit to growth from tariffs would be temporary.

Over a longer-term horizon, tariffs could even promote growth, said Maddi Dessner, head of asset class services at Capital Group, boosting industries that will benefit from less competition globally. On the other hand, their initial impact could increase price pressures.

"The truth is it's probably going to be somewhere in between those two things," she said, adding tariffs were partly why Capital Group now forecasts 10-year Treasury yields at 3.9% over a 20-year horizon, up from a 3.7% forecast last year.

'NOT THERE YET'

Stagflation emerged as a source of anxiety as recently as 2022, when inflation rates spiked and stock and bond prices plummeted, but that scenario did not materialize as inflation eventually eased and growth remained resilient.

Many believe that the U.S. economy will once again steer clear of stagflation.

So-called core inflation at about 3% remains well below the levels hit in the 1970s, when the annual rate of core inflation averaged about 7%. This time around inflation expectations remain "anchored", meaning the long-term inflation picture is not fluctuating wildly with each fresh piece of economic data, said Evercore ISI in a recent note.

Still, Mark Zandi, chief economist at Moody's Analytics, warned the market may be underestimating stagflation risks. The prospect of large-scale deportations of workers without visas or other work documents, another Trump campaign pledge, also would fuel inflation, he noted.

"Tariffs and deportations are a recipe for inflation and hurt growth; both are negative supply shocks," he said, adding that negative supply shocks such as a crude oil price surge contributed to 1970s stagflation.

Guneet Dhingra, head of US rates strategy at BNP Paribas, said the market has been "complacent" over the past six months, focusing on Trump's pro-growth policies. He said stagflation-wary investors could sell two-year Treasuries, likely to lose value due to higher inflation, and buy 10-year Treasuries that would benefit in a low-growth scenario.

Surging interest in gold , which hit another all-time high on Wednesday, suggests some investors are worried, as gold is one of a handful of assets that hold their value in a stagflationary environment, said Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors.

The other big winner would be cash, said Brandywine's McIntyre, but he added that for now he was holding back from making big shifts to cash-like fixed income instruments.

"I'm not there yet," McIntyre said.