Could Current Tariff Policies Lead to Stagflation?

As the global economy navigates unprecedented challenges, economists are growing concerned about the potential onset of stagflation in the U.S., primarily driven by current tariff policies. Recent analyses and expert warnings highlight the risks these economic policies pose, suggesting we might be on the brink of experiencing a scenario reminiscent of the 1970s.

How Tariffs Could Contribute to Stagflation

Stagflation is an economic phenomenon characterized by the coexistence of high inflation, slow economic growth, and rising unemployment. This was notably experienced in the U.S. during the 1970s, fueled by oil price shocks and policy missteps.

Tariffs could lead to higher prices (inflation). Tariffs function as a tax on imported goods, pushing up the costs for importers. In many cases, these increased costs are passed down to consumers, leading to higher prices across various products, from electronics to necessities like clothing and food.

As tariffs elevate the price of goods, consumers’ purchasing power decreases, leading to reduced consumer spending — a vital component of GDP growth. For businesses, heightened production costs can deter investment and hiring, further slowing economic progress.

Finally, when economic growth is stifled, businesses often cut jobs or delay new hiring, which leads to rising unemployment rates — a hallmark of stagflation.

Expert Views and Projections

Economists have expressed concerns about the current economic trajectory, noting that ongoing tariff policies heighten the risk of stagflation. Members of the Federal Reserve have described this mix of inflation and stagnation as a potential “nightmare scenario.”

Models suggest that a continuation or escalation of these tariffs could result in a 1% dip in U.S. real GDP by the end of 2025, accompanied by an increase in inflation, effects that any retaliatory actions from international partners would exacerbate.

During the 1970s, the U.S. faced severe stagflation, disrupted by oil shocks that led to high inflation and persistent unemployment. The period forced a reevaluation of economic policies and highlighted the limitations of traditional tools in combating inflation and unemployment simultaneously. Ultimately, it took ratcheting up interest rates to nosebleed levels to break the cycle — something likely unpalatable in today’s highly charged political environment.

Key Takeaways

Though today’s economic situation differs from the 1970s, with trade barriers, supply chain interruptions, and policy missteps now at the forefront, the underlying mechanisms of stagflation risk remain similar. The U.S. now benefits from a more flexible labor market and a deeper understanding of inflation expectations, but it remains vulnerable to global economic fluctuations and high national debt levels.

Current tariff policies could pose significant risks to the U.S. economy, as evidenced by the possibility of returning to a state of stagflation.