Inflation is tame. Markets are at record highs. But economists warn Trump is still playing with fire on tariffs

CNN

08-07-2025

US stocks have rocketed back to all-time highs. The unemployment rate remains historically low. And the inflation rate is lower than when President Donald Trump took office.
These developments could embolden the White House to play hardball on trade, taking a tougher stance in negotiations with other nations and threatening sky-high tariff rates.
But those positive milestones might have a negative side effect: lulling Trump officials into believing the economy is safe from harm fueled by the president's trade war.
Many economists and trade experts worry the damage from the trade war has not been canceled; it just hasn't arrived yet. They fear that overdoing tariffs and prolonging the uncertainty will only make matters worse.
'No one should be lulled into complacency,' Douglas Holtz-Eakin, president of center-right think tank American Action Forum, told CNN in a phone interview. 'There is no way you can avoid these price pressures. The tariffs are real. It will show up. The only question is how fast and where. That story has yet to play out.'
And it's a moving target because the tariff rates and deadlines are in an almost constant state of change. Under Trump, tariffs have been announced, delayed, dialed back and revived seemingly at random.
In the latest twist, Trump unnerved investors on Monday by announcing double-digit tariff rates on Japan, South Korea and a handful of other countries. However, the new tariffs don't kick in until August 1, extending the uncertainty that investors and CEOs despise.
The market reaction Monday may have been more negative if not for Trump's history of walking back his most extreme proposals. Wall Street traders have even coined a phrase for this pattern, calling it the TACO trade, short for Trump Always Chickens Out.
Therein lies the challenge: It's incredibly difficult to measure the tariffs' impact, given the extensive lags between when they're announced and when they actually hit the US economy.
It can take weeks or months for tariffs to filter through the system, going from manufacturers to wholesalers to retailers and ultimately American consumers.
Stores knew tariffs were coming, so many tried to beat the clock by importing inventory before tariffs kicked in. That means many items on store shelves this spring and early summer were still priced at those low pre-tariff levels.
In a reflection of that trend, the consumer price index (CPI) rose 2.4% in May, down from 3% in January when Trump took office.
But eventually that pre-tariff inventory will run out, raising the risk that price hikes are still on the way.
'If people think just because we got away with two months and it's all good, that's a mistake,' said Holtz-Eakin, a former economic adviser to President George W. Bush and director of the nonpartisan Congressional Budget Office.
As Federal Reserve Chairman Jerome Powell has noted, some goods exposed to tariffs have experienced significant price increases, including appliances, toys, computers and other electronics.
Yet those price hikes have been masked by price drops elsewhere, including on gasoline.
'It looks like all the numbers are coming in their favor, but you can't just put all this price pressure into the system and expect it will disappear. It can't,' said Mary Lovely, a senior fellow at the Peterson Institute for International Economics.
David Kelly, chief global strategist at JPMorgan Asset Management, agreed that tariffs will eventually feed through — even though they haven't yet in a big way.
'We should be careful. Complacency could come from delayed reaction. That's the danger of delayed reactions,' Kelly said.
The JPMorgan executive compared it to a toddler who falls on the pavement and doesn't immediately start crying. It doesn't necessarily mean injury was avoided; the reaction may just be delayed.
'The economy is OK, but it's losing some momentum here. And I think the tariff uncertainty is very real,' Kelly said.
Of course, it's almost impossible to forecast precisely how this will play out.
There is no playbook for how a modern economy reacts to on-again, off-again tariffs at the scale Trump has proposed. The matter is complicated by the 2022 inflation crisis — the worst in 40 years — and the psychological scars from that episode. Investors, small business owners and consumers are more sensitive to price hikes than during Trump's first term.
Wall Street cranked up the pressure on the White House after those April 2 tariffs shocked many, coming in higher than even the worst-case scenarios.
After bond and stock markets freaked out by pricing in an imminent global recession, Trump blinked. He paused the tariffs for 90 days to allow time to negotiate.
That delay set the stage for an epic market recovery, with US stocks recouping all of their steep losses in lightning speed. In the eyes of investors, tariffs went from a clear-and-present danger to merely background noise.
'My feeling is the administration will feel somewhat empowered to play hardball because the stock market is at an all-time high,' said Keith Lerner, co-chief investment officer and chief market strategist at Truist Wealth.
US markets finished at record highs on Thursday after the Bureau of Labor Statistics reported the economy added a better-than-expected 147,000 jobs in June. The unemployment rate unexpectedly ticked down to 4.1%.
However, beneath the surface of that June jobs report, there were some concerning signals about the state of the labor market.
For instance, job growth was concentrated in a limited number of sectors, not widespread as jobseekers and economists would prefer. And the unemployment rate fell in part because the number of jobseekers fell, a trend that Morgan Stanley said reflects a 'chilling effect' from the Trump administration's immigration crackdown.
'I worry more about a recession and unemployment rising than inflation,' said Kristina Hooper, chief market strategist at Man Group, the world's largest listed hedge fund.
Hooper said that while tariff-driven inflation is on the way, it will likely be short-lived.
On the other hand, policy uncertainty linked to trade can depress business investment in the medium term.
'There seems to be something of a perfect storm pressuring many households,' Hooper said, referring to price increases and student loan payments resuming.
That's why Hooper urged the Trump administration to get trade deals done 'quickly' to give businesses clarity on the rules of the road.
'In that kind of environment,' Hooper said, 'all you need is a modest increase in unemployment to tip an economy into much slower growth – and potentially a recessionary environment.'