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

CBS News

2 days ago

Some economists are cautioning that President Trump's sweeping new tariffs on U.S. trade partners, which took effect Thursday, increase the risks that the U.S. economy could enter a period of stagflation.
A mashup of "stagnation" and "inflation," the term describes periods marked by high prices and low GDP growth, such as the economic doldrums of the 1970s. To be sure, U.S. economic growth, though slower so far this year than in 2024, remains relatively strong, and inflation remains far below its post-pandemic spike.
But economists are flagging the potential for fresh tariffs, which took effect Aug. 7,to fuel higher prices as businesses pass on the costs of the new import duties to consumers. With the latest round of import duties, the effective average tariff rate now stands at 18%, the highest since 1934, according to an analysis from the Yale Budget Lab.
Inflation likely rose 2.8% on an annual basis in July, inching higher from the 2.7% annual rate notched in the prior month, according to forecasts from economists polled by FactSet. July data for the Consumer Price Index, or CPI, will be released at 8:30 a.m. ET on Aug. 12.
"The stagflation theme in markets is intensifying," Apollo chief economist Torsten Slok wrote in a research note Thursday.
While prices likely crept higher last month, they're still nowhere near the post-pandemic price spike that financially hobbled many households. Yet an increase would represent a reversal of a downward trend earlier this year, and push the inflation rate farther from the Federal Reserve's goal of reaching a 2% annual rate.
The economy could face another hit from tariffs if some U.S. businesses, which are on the hook for paying the import duties to the federal government, scale back hiring or expansion plans to cope with those higher costs, economists added. Last week's disappointing employment report suggested the U.S. job market is starting to wobble from the uncertainty of on-again, off-again tariffs, they noted.
"To offset internal costs, you may look at reducing your workforce and curbing wage growth to offset part of the cost of goods increase," EY-Parthenon chief economist Greg Daco told CBS MoneyWatch.
U.S. GDP is also forecast to slow throughout 2025, with economists polled by FactSet pegging this year's growth at 1.5%, down from 2.4% in 2024.
The White House took issue with concerns raised by some economists about the potential for stagflation. "Inflation continuing to remain cool and growth rebounding in Q2 both suggest stagflation is simply the latest buzzword for panican paranoia," White House spokesman Kush Desai told CBS MoneyWatch.
"Panican" is a term coined by Mr. Trump earlier this year to refer to the fears expressed by some critics about his tariffs.
The U.S. economy is facing a challenging scenario from the combination of a weaker job market and higher inflation, Skanda Amarnath, executive director of Employ America, a monetary policy research institute, told CBS MoneyWatch.
"The U.S. economy appears to be hitting a mild form of stagflation," Amarnath said. "I'd call it stagflation lite."
The dangers of higher inflation and a weaker job market were highlighted by Federal Reserve Chairman Jerome Powell last month when he discussed the central bank's decision to hold rates steady. Powell pointed out that job creation has slowed, adding risks to the labor market, while inflation remains above the Fed's 2% annual goal.
The Fed has a dual goal of keeping both prices and unemployment low. Achieving those goals requires different strategies, however. Because high interest rates make it more expensive for consumers and businesses to borrow, the Fed tends to hike rates to fight inflation.
But when unemployment spikes, the Fed typically cuts its benchmark rate to make borrowing cheaper, which can encourage businesses to hire and expand.
"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.
He added that the Fed is "trying to do the right thing in what is a challenging situation because you're being pulled in two directions and you have to decide which of those it took to go in."
With the job market now showing signs of stress, the challenge is whether the Fed should cut rates, or hold off because inflation remains higher than the central bank's goal — and is projected to inch higher, Slok noted.
The manufacturing, retail, wholesale and construction industries, which are sensitive to the impact of tariffs, all notched fewer job gains than were initially reported, with the July jobs report's revisions. Manufacturing jobs declined for three consecutive months from May through July, the data shows.
"That's consistent with a level of uncertainty on the trade side depressing the willingness to hire," Amarnath said.
At the same time, "goods prices have picked up speed," he added. "Household supplies and furniture, apparel and used cars are all starting to see upward momentum, and I think tariffs are an obvious reason for that."