Stagflation—the combination of high inflation, slow economic growth, and rising unemployment—is back in the headlines. With President Trump's new global tariffs and economic warning signs flashing across the freight and labor markets, risks are low but rising.
There is no easy policy fix for this scenario. Wall Street is looking to the Federal Reserve for assurances, but the Fed is stuck between two competing risks—should it raise interest rates to keep inflation low or cut interest rates to juice the economy and avoid a potential recession?
If President Trump can use tariffs to negotiate, it may reduce the negative economic impact of the tariffs. A successful negotiation with a major trading partner would likely pull some of the losses on Wall Street back into the market. However, trade negotiations take time, and the US could be well into a slowdown before any progress can be noticed by a trade deal.
Here’s how the current policy actions could steer the U.S. toward stagflation—and how it’s already taking shape.
Massive Tariffs Introduced
On April 2, 2025, President Trump announced sweeping tariff increases, setting a base 10% tariff on nearly all imports and applying elevated rates—up to 46%—on goods from 57 countries. This represented the largest trade-related tax increase since World War II. However, implementation of the tariffs was temporarily paused following backlash from key industries and international partners.
Impact: The initial announcement triggered a flurry of last-minute imports and consumer stockpiling as businesses braced for higher costs.
Higher Costs for Goods (Inflation Trigger)
Tariffs raise prices on imported goods. Domestic suppliers often follow, increasing prices across the board. This leads to cost-push inflation — prices rise due to higher production costs, not increased demand.
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Trade Disruption + Supply Chain Distortion
Companies are front-loading inventory to beat tariffs, but that behavior isn't sustainable.
Slowing Economic Growth
The Stagflation Trap
All three ingredients are now visible:
It is possible that at some point the Fed will face a dilemma: raise rates to tame inflation and risk recession, or ease rates and risk even worse inflation.
Key Takeaway
Tariffs can spark inflation while dampening economic growth, creating a policy trap with no easy exit. Aggressive use of tariffs risks tipping the balance toward stagflation — a scenario that is incredibly difficult to reverse with traditional tools.
Stay tuned. We’ll keep decoding the data so you don’t have to.