Six months ago, as Alta’s advisors collaborated to write our 2025 Insights report on the trends and dynamics that will impact the equipment finance industry in the year ahead, we were thinking broadly across a range of economic scenarios. While the concept of stagflation was on our radar screen at that time, the probability level was too low to call it out directly.

If there is one thing we have been able to count on in 2025, it’s unpredictability, and now halfway through a year that has thrown many curveballs at the financial markets and the economy, we are seeing early warning signs that stagflation has moved from the “probably not” category into the realm of “possibly so.”

Fed Chairman Jerome Powell said in public comments in April that the Trump administration’s tariffs are likely to slow economic growth while accelerating inflation—the two dynamics that make up stagflation. Those concerns were echoed in the minutes of the May meeting of the Federal Reserve’s Federal Open Market Committee. Economic projections released in conjunction with the Fed’s June meeting called for slower growth, rising unemployment and higher inflation. JP Morgan CEO Jamie Dimon echoed this concern in a May interview with Bloomberg where he highlighted the risk of stagflation

It's time to add stagflation to the list of headwinds that equipment finance leaders should strategically prepare for to stay nimble in the current environment.

What is Stagflation?

Stagflation is a highly unusual scenario where high inflation, slow GDP growth, and increased unemployment occur all at once. It’s a triple threat nobody wants. It’s also a dynamic that most current industry practitioners have not experienced. The last major stagflation event in the U.S. occurred in the 1970s and early 1980s. The trigger was the energy crisis spurred by the 1973 OPEC oil embargo, and then the 1979 Iranian Revolution. Both of these events sent oil prices soaring, slammed the economy into recession and drove rising unemployment. The Fed’s lack of action on interest rates exacerbated the issue.

To be fair, nobody is predicting that things will get as bad as they were in the 1970s. The table below offers some perspective.

What we learned from this period is that supply shocks can fuel inflation even in a weak economy. Wage and price spirals can make that inflation sticky. And combating this dreaded stagflation requires tight monetary policy, which may cause short-term pain.

How Is This Relevant Today?

A half century ago, it was oil supply shocks that drove inflation. Today, aggressive tariffs, potential supply-chain disruptions, and growing geopolitical conflict could prove to be inflationary catalysts. At the same time, GDP growth projections continue to cool, with many experts projecting growth to contract to less than 2% by the end of the year. The unemployment rate held steady at 4.2% in May. However, there are signs of pressure in the jobs market. Recent college graduates are having a historically difficult time finding work, and the reality of artificial intelligence’s impact on employment is starting to come into focus, with companies such as Amazon making clear statements about how AI will drive a workforce reduction. 

Taken together, these are ripe conditions for stagflation.

Dimon was the first major CEO to sound the alarm that the U.S. faces stagflation risks in May. He cited inflationary pressures from massive government deficits, defense spending, and tensions stemming from unpredictable trade policy as risks the markets may be underestimating. Powell’s warning was more tempered. He has indicated he sees no hard stagflation signals in the data yet, but acknowledges that the warning signs—stubborn inflation, slower growth, and rising unemployment—are elevated.

Some market watchers, like Dimon, are forecasting “slowflation.” This is a combination of slow GDP growth between 1% and 1.5% with inflation stuck around 3%, with steady unemployment. Just like the oil shocks of the 1970s, an exogenous shock could easily tip the scales into stagflation territory.

Keep in mind that not all projections are doom and gloom. Some economists see stalling economic momentum driving increased unemployment, lowering wages and in turn reducing inflation as the demand for goods and services declines. But with so many unknowns on the table, this is a good time to ensure you are prepared for anything.

What Measures Are We Watching?

Unfortunately, there isn’t a “Stagflation Index” to guide us through these turbulent economic times. However, there is one economic measure that helps to assess the risk—the Misery Index. This informal economic indicator adds the U.S. inflation rate and the unemployment rate, available from the Bureau of Labor Statistics, to get a pulse on the economy. 

In 1980, the Misery Index was a staggering 22%. Through May 2025, the index came in at 6.6%, which is down from pre-election highs of roughly 7% throughout 2024. Keep in mind that the impact of volatile trade policy has not yet shown up in the components of this index, so this is an important metric to watch in the months to come.

It’s also important to watch how other key economic indicators move in relation to one another. The Consumer Price Index and unemployment rate are important to monitor as harbingers of pending economic distress. Declines in leading indicators such as GDP growth that come on top of sustained inflation may suggest a rising stagflation risk. Bond yields are another important metric. If nominal bond yields rise while GDP slows, this suggests rising inflation and stalling economic momentum—a classic stagflation signal.

Ratings actions by S&P, Moody’s, Fitch Ratings, and KBRA also hold clues. For example, Fitch lowered its 2025 sector outlook for North America corporates to “deteriorating” as its outlook for GDP growth, inflation, and consumer spending continues to worsen amid regulatory and policy uncertainty. 

The Potential Impact on Equipment Finance, and How to Prepare

While we don’t have Survey of Equipment Finance Activity statistics from the Equipment Leasing & Finance Association to look back on from the 1970s and 1980s to measure specific impacts on returns, margins, and credit, we know equipment leasing during the 1970s faced the following challenges:

• Demand for new equipment fell as staggeringly high interest rates made financing prohibitively expensive. Borrowing costs during this period soared to around 20%. This made lease/purchase analyses quite common (and these had to be done by hand in the days before modern computers).
• Credit quality weakened as stressed businesses across all industries struggled to keep the doors open, driving up delinquencies and charge-offs.
• Residual values declined as high inflation suppressed equipment resale values, thus impairing secondary market returns. It was much more common practice during this period for leasing companies to take returns of equipment to refurbish and re-lease.

Of course, we do know that equipment leasing is a hedge against inflation. It’s likely we’ve seen acceleration of equipment demand since the fourth quarter of 2024 as firms have sought to get ahead of higher equipment prices stemming from supply-chain issues and tariffs.

What can equipment leasing and finance companies do to prepare for a potential stagflation scenario? Many of you are probably managing for inflation and rising rates already, but stagflation risk adds urgency. Here are some additional recommendations:

• Strengthen underwriting discipline and active portfolio monitoring to preempt credit deterioration.
• Stress-test the portfolio for credit issues in different higher-rate scenarios.
• Re-evaluate residual-value assumptions—especially in volatile asset classes.
• Consider implementing interest-rate hedges on debt facilities to protect against potential interest-rate hikes. 
• Diversify funding sources to spread funding risk and maintain sufficient cash balances to hedge against liquidity constraints.
• Consider inflation-linked lease terms to protect returns.
• Implement rate indexing or use adjustable-rate formulas.
• Consider alternatives to purchase options or outright sales (e.g., recovering and redeploying equipment or partnering or profit-sharing with third-party equipment dealers) at end-of-term.

The Bottom Line: Be Ready

While outright stagflation remains unlikely, current economic conditions—persistent inflation, slowing growth, elevated bond yields, and uncertain policy—have pushed it into the realm of possibility, and deserve careful monitoring.

Equipment finance firms with agile underwriting and adaptive pricing will navigate stagflation more resiliently, adjusting terms, pricing, and risk appetite as conditions evolve. Their relative success will depend on their ability to swiftly recalibrate credit standards, manage residual and liquidity risks, and offer financing products that fit customers’ constrained budgets.