Economists Warn of Rising Stagflation Risk in US Amid Tariffs

Economists are increasingly concerned about the potential for stagflation in the United States, a scenario where economic growth stagnates while inflation remains high. This situation is exacerbated by tariffs, which are expected to drive up consumer prices and slow economic growth. The deteriorating job market will further strain household budgets from both sides.

Central banks around the world are finding it challenging to address stagflation using monetary policy. Attempting to solve one problem often worsens the other. If the U.S. economy manages to avoid a recession triggered by tariffs, the risk of a financially painful period of stagflation is rising, according to economists.

There is a divide among forecasters regarding whether President Donald Trump's trade war will push the economy into a recession. However, many recent predictions emphasize the risk of a period of high inflation and low economic growth, or stagflation. This includes officials from the Federal Reserve, who anticipate that tariffs will slow economic growth, harm the job market, and drive up consumer prices.

Lindsey Piegza, chief economist at Stifel Financial, believes that the job market and consumer spending have enough resilience to avoid a full-blown recession from the trade war, provided that recently announced tariffs can be reduced through negotiations. However, she warns that economic growth will be close to zero in the coming quarters.

Piegza states, "The economy is essentially in a state of no acceleration. If this lack of acceleration continues into the second half of this year, I believe that long-term stagflation poses a major risk to the U.S. economy. In fact, I think this risk is greater than that of a full economic downturn or recession."

Piegza is not the only prominent economist sounding the alarm on stagflation. Adam Posen, president of the Peterson Institute for International Economics, raised this issue in an article for Foreign Affairs this week. Posen wrote, "As Trump claims to want to achieve, this would mean stagflation, a macroeconomic nightmare from the 1970s and during the COVID-19 pandemic, when the economy shrank while inflation rose."

Stagflation poses significant challenges for both ordinary households and central bank officials. The primary tool central banks use to influence the economy—monetary policy—can either help curb inflation or boost the job market, but not both simultaneously. The Federal Reserve can lower its benchmark federal funds rate to stimulate the economy, but it may be reluctant to do so if the inflation rate exceeds the central bank's 2% target. Conversely, raising rates to combat inflation would further damage an already weakened job market.

Federal Reserve Chairman Jerome Powell acknowledged the challenges of addressing stagflation in a speech on Wednesday, describing it as a "challenging situation." Piegza added, "Stagflation indeed puts policymakers in a bind, rendering traditional monetary policy indicators essentially useless. The Federal Reserve will tend to raise rates to try to eliminate inflation. But the economy is already extremely weak. Conversely... So I think stagflation is the biggest risk currently facing the U.S. economy."