Trump's New Tariffs Spark Stagflation Fears

President Donald Trump's latest wave of sweeping tariffs on U.S. trade partners has sparked growing concerns among economists that the American economy could be heading toward a period of stagflation—a dangerous mix of high inflation and stagnant economic growth. These fears are intensifying as the new tariffs, which took effect on August 7, are raising the effective average tariff rate to 18%, the highest since 1934, according to an analysis from the Yale Budget Lab.

While the U.S. economy is still growing, albeit at a slower pace than in 2024, inflation remains a pressing issue. Economists are warning that the new tariffs could push prices even higher as businesses pass on the costs of these import duties to consumers. Forecasts suggest that inflation could rise to 2.8% in July, up from the 2.7% recorded in June, according to data from FactSet.

"The stagflation theme in markets is intensifying," said Apollo chief economist Torsten Slok in a recent research note. While inflation remains far below the post-pandemic spike that plagued many households, any increase would mark a reversal of the downward trend seen earlier this year and push the inflation rate further away from the Federal Reserve's 2% target.

Additionally, the new tariffs could have a ripple effect on the U.S. job market. Some economists warn that businesses may scale back hiring or expansion plans to cope with the higher costs. This concern was reinforced by a recent disappointing employment report, which suggested that the job market is already showing signs of strain.

"To offset internal costs, you may look at reducing your workforce and curbing wage growth to offset part of the cost of goods increase," said EY-Parthenon chief economist Greg Daco. This could lead to a slowdown in economic growth, with economists forecasting U.S. GDP to slow to 1.5% in 2025, down from 2.4% in 2024.

The White House has dismissed these concerns, calling them "panican paranoia." White House spokesman Kush Desai stated that the economy is in good shape and that the term "panican"—coined by Trump earlier this year—refers to the fears expressed by critics about his tariffs.

"Inflation continuing to remain cool and growth rebounding in Q2 both suggest stagflation is simply the latest buzzword for panican paranoia," Desai said. However, many economists disagree, arguing that the combination of a weaker job market and rising inflation is creating a challenging scenario for the U.S. economy.

"The U.S. economy appears to be hitting a mild form of stagflation," said Skanda Amarnath, executive director of Employ America, a monetary policy research institute. "I'd call it stagflation lite." He emphasized the dangers of higher inflation and a weaker job market, which were also highlighted by Federal Reserve Chairman Jerome Powell in a recent speech.

"The economy is in good shape, but it's an unusual situation in that you have risks to both sides of the mandate," Powell said at a July 30 press conference. The Fed is struggling to balance its dual goals of keeping prices low and unemployment low, which often require different strategies.

As the economy continues to face pressure from the new tariffs, the challenge for the Fed is whether to cut interest rates to stimulate growth or hold off to keep inflation in check. With the job market showing signs of stress and inflation expected to rise, the path forward remains uncertain.