Key takeaways:
- Rising power and enter prices are colliding with softer shopper demand, making a extra advanced problem than inflation alone.
- Meals producers are dropping pricing energy as shoppers commerce down, forcing harder selections on margins, promotions and funding.
- If stagflation takes maintain, companies might want to handle each price inflation and demand weak spot on the identical time, with restricted room for error.
Stagflation is a type of financial phrases that tends to remain in textbooks – till it doesn’t. Proper now, it’s edging again into real-world conversations, not as a theoretical threat however as one thing starting to indicate up within the information. It often surfaces when the alerts cease lining up – when costs are nonetheless climbing however development begins to stall. And that pressure is beginning to rear its ugly head.
Vitality markets have tightened once more as battle within the Center East feeds by way of to grease, with Brent crude shifting again above $90 a barrel. On the identical time, inflation hasn’t eased as shortly as many had hoped, whereas development forecasts are being nudged down quite than up. On their very own, every of those can be manageable; collectively, they create a extra uneasy backdrop.
Economists are already adjusting their outlooks. Analysts at S&P International say inflation expectations have been revised upwards, whereas development projections have been trimmed ‘just about throughout the board’ as geopolitical dangers intensify.
That broader shift frames latest feedback from Phillip Braun, scientific professor of finance on the Kellogg Faculty of Administration, Northwestern College. “Stagflation is when the financial system is stagnant and inflation is rampant,” he advised Kellogg Perception, describing it as a state of affairs the place “the sum of two negatives equals three negatives.”
The comparability he attracts isn’t particularly reassuring. The US has largely prevented stagflation because the Nineteen Seventies, when oil shocks fed into a protracted stretch of excessive inflation and weak development. Related issues surfaced throughout the COVID restoration however didn’t fairly take maintain.
Now, they’re again on the desk. Having dismissed the probability of stagflation in 2022, Prof Braun is extra cautious. “Right this moment’s surroundings is extra just like the Nineteen Seventies than 4 years in the past,” he stated. “The surroundings is ripe for stagflation with this oil-price shock.”
He’s not alone together with his views. Diane Swonk, chief economist at KPMG, has warned that escalating tensions within the Center East have “considerably heightened the danger of worldwide stagflation,” significantly by way of disruptions to power and fertilizer markets. Austan Goolsbee, president of the Federal Reserve Financial institution of Chicago, has additionally cautioned that when inflation is pushed by provide shocks and labour markets start to chill, central banks are left with fewer efficient choices.
Price stress is coming from all instructions
Price inflation isn’t new for meals producers. What feels totally different now, nevertheless, is how widespread it’s.
Vitality sits on the centre of the present cycle. When oil and fuel costs rise, the impact spreads shortly. Fertilizer prices enhance, which feeds into crop manufacturing. Packaging turns into costlier. Manufacturing itself turns into costlier, significantly in operations that rely closely on warmth or refrigeration.
The impression is exhibiting up throughout key indicators. The Meals and Agriculture Group (FAO) reported a 2.4% enhance in its Meals Value Index in March 2026. Cereals rose by round 1.7% month-on-month, influenced partially by greater power and fertilizer prices. Wheat markets are tightening as planting selections reply to these inputs.
The macro backdrop factors in the identical path. The Worldwide Financial Fund (IMF) has stated the present geopolitical surroundings is prone to lead to “greater costs and slower development.” The Organisation for Financial Co-operation and Improvement (OECD) now expects G20 inflation to succeed in 4.0% in 2026 – about 1.2 share factors greater than beforehand forecast – whereas additionally decreasing development expectations.
Manufacturing information tells an identical story. UK factories recorded their steepest rise in enter prices since 1992 in March, largely pushed by power and transport. Output has edged into contraction. Throughout the eurozone, enter price inflation has picked up once more at the same time as demand indicators soften.
This isn’t a state of affairs the place one price spike may be offset elsewhere. A number of pressures are constructing on the identical time, which makes balancing them tougher.
What’s stagflation?
Stagflation is when excessive inflation coincides with weak or slowing financial development.
Usually, inflation falls as demand weakens. Stagflation breaks that sample, with costs persevering with to rise even because the financial system stalls.
It’s usually triggered by provide shocks, similar to spikes in power or uncooked materials prices, which push up costs whereas weighing on development.
It creates a tough squeeze for producers: prices rise throughout inputs, however demand weakens on the identical time, limiting how far worth will increase can go.
The time period is most carefully related to the Nineteen Seventies oil disaster, when power shocks drove a protracted interval of excessive inflation and gradual development.
The demand aspect is the place it will get tough
The trade has spent the previous few years coping with rising prices and, in lots of instances, passing them by way of.
That turns into tougher when shoppers begin to push again. Information from the USA Division of Agriculture (USDA) exhibits meals costs within the US rose 3.1% year-on-year in early 2026. Some classes are rising quicker – sugar and sweets are up round 9.0%, whereas non-alcoholic drinks have elevated by roughly 5.6%. After successive worth will increase, shoppers have gotten extra selective.
That shift is obvious in firm efficiency. PepsiCo has diminished costs on sure snack strains by roughly 10%-15% following weaker volumes in North America. Mondelez Worldwide has reported quantity declines of round 2%–3% in components of its portfolio. The Hershey Firm continues to face elevated cocoa prices, which surged greater than 150% year-on-year at one stage, limiting pricing flexibility. And Nestlé has additionally flagged low single-digit quantity declines in some classes as shoppers commerce down.
That is the place the stability turns into tougher to handle. Pricing remains to be wanted, however it doesn’t land in the identical means. Shoppers modify – generally subtly, generally extra shortly. They swap manufacturers, purchase much less or transfer to cheaper choices. Retailers push tougher in negotiations. Promotions begin to return, though they eat into already tight margins.
Dairy illustrates how uneven this may be. Within the UK, farmgate milk costs have fallen by as much as 40% between October 2025 and early 2026 attributable to oversupply. Processors, in the meantime, proceed to face greater working prices. That hole is tough to shut.
Managing either side without delay is the true problem
Stagflation complicates decision-making as a result of the same old levers don’t align. Elevating costs dangers dropping quantity. Holding again compresses margins. Slicing prices comes with trade-offs. Funding turns into tougher to justify when demand is unsure.
Stress doesn’t land in only one a part of the sector. It exhibits up throughout all of them, simply in barely alternative ways. Bakery and snacks face greater wheat, oils and packaging prices whereas additionally coping with stronger private-label competitors. Beverage corporations are balancing packaging inputs and ingredient volatility with extra cautious shoppers. Confectionery stays uncovered to cocoa and sugar dynamics, with restricted room to maintain rising costs. Dairy continues to function between risky farmgate costs and protracted processing prices.
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What follows isn’t a single decisive transfer. It tends to be a collection of smaller changes – pricing adjustments, pack-size tweaks, tighter sourcing, extra selective funding.
To compound it, there’s additionally the query of coverage. Within the Nineteen Seventies, makes an attempt to cushion the impression of an oil shock ended up fuelling inflation additional. With Jerome Powell’s time period on the Federal Reserve nearing its finish, the path of financial coverage is much less sure. A extra accommodative method, some economists warn, might threat repeating earlier errors.
If that occurs, the margin for error narrows additional. And, as Prof Braun put it, companies ought to count on “rising costs throughout the board and diminished demand”.
In different phrases, batten down the hatches and put together for a harder stretch forward.
