Why Trump’s sweeping new tariffs are fueling stagflation concerns among economists

President Trump’s new tariffs on U.S. trade partners have sparked concerns among economists about the possibility of stagflation in the U.S. economy. Stagflation, a term combining stagnation and inflation, refers to a period marked by high prices and low GDP growth, reminiscent of the economic struggles of the 1970s. While the U.S. economy has shown relative strength this year, with growth rates slightly slower than in 2024, the implementation of fresh tariffs has raised fears of inflation as businesses pass on the costs to consumers. The effective average tariff rate now stands at 18%, the highest since 1934, according to a Yale Budget Lab analysis.

Economists predict a rise in inflation to 2.8% on an annual basis in July, up from 2.7% in the previous month. The Consumer Price Index (CPI) data for July is set to be released on August 12, with expectations of a slight increase in prices. The concern is that this upward trend in inflation could push the rate further from the Federal Reserve’s target of 2% annual inflation.

The potential impact of tariffs on businesses is also a cause for worry, as companies may scale back hiring or expansion plans to offset the higher costs. The recent disappointing employment report suggests that the job market is already feeling the effects of the uncertainty surrounding tariffs. This could further dampen economic growth, with economists forecasting a slowdown in GDP growth to 1.5% for this year, down from 2.4% in 2024.

The White House has downplayed concerns of stagflation, with a spokesman dismissing the fears as “panican paranoia.” However, experts warn that the combination of a weaker job market and higher inflation poses a challenging scenario for the U.S. economy. Federal Reserve Chairman Jerome Powell has highlighted the risks posed by slower job creation and higher inflation, emphasizing the dual goals of keeping prices and unemployment low.

With the Fed facing pressure to make decisions that balance these conflicting goals, the challenge lies in determining whether to cut rates to stimulate hiring or hold off due to higher inflation. Industries sensitive to tariffs, such as manufacturing, retail, wholesale, and construction, have seen fewer job gains, indicating the impact of trade uncertainty on hiring decisions. The uptick in prices for goods like household supplies, furniture, apparel, and used cars is seen as a direct result of tariffs.

Overall, the U.S. economy is at a crossroads, with the Fed navigating a delicate balance between maintaining economic stability and addressing the challenges posed by tariffs and inflation. The road ahead remains uncertain, with the potential for stagflation looming as a significant risk to the country’s economic outlook.