Tariffs Raise Risk of Slower Growth and Higher Prices
Economists are cautioning that President Donald Trump’s latest round of import tariffs, which took effect August 7, could increase the risk of stagflation—a combination of stagnant economic growth and persistent inflation. The effective average tariff rate now stands at 18%, the highest since 1934, according to the Yale Budget Lab. While U.S. growth remains relatively strong compared with 2024, forecasts point to a slowdown alongside upward pressure on prices.
July inflation is expected to come in at 2.8% year-over-year, slightly above June’s 2.7% rate, according to FactSet estimates. If confirmed, it would mark a reversal from the downward inflation trend earlier this year and move the rate further from the Federal Reserve’s 2% target. Economists warn that higher import costs could be passed on to consumers, raising prices while also discouraging business expansion and hiring.
Job Market Shows Early Signs of Strain
Recent labor market data suggest that hiring is slowing in tariff-sensitive sectors. The July employment report was weaker than expected, with revisions showing fewer job gains in manufacturing, retail, wholesale, and construction. Manufacturing employment has fallen for three consecutive months. Some companies may be offsetting higher goods costs by limiting wage growth or reducing their workforce, said EY-Parthenon chief economist Greg Daco.
FactSet’s consensus forecast calls for U.S. GDP growth to slow to 1.5% in 2025 from 2.4% in 2024. This cooling outlook, combined with elevated inflation, presents a challenge for policymakers tasked with balancing the Federal Reserve’s dual mandate of price stability and maximum employment.
White House Pushes Back on Stagflation Concerns
The White House dismissed warnings about stagflation, with spokesman Kush Desai calling it “the latest buzzword for panican paranoia”—a term coined by Trump to describe what he views as overblown fears about tariffs. Officials point to steady inflation levels and a rebound in second-quarter growth as evidence that the economy is not at risk of repeating the 1970s’ stagnation and inflation spiral.
However, some analysts, including Employ America’s Skanda Amarnath, say the U.S. may be experiencing a “mild form of stagflation” as higher goods prices coincide with weaker job creation. Rising costs for household supplies, furniture, apparel, and used cars are among the areas showing renewed price momentum, with tariffs seen as a primary driver.
Fed Faces Policy Dilemma
Federal Reserve Chair Jerome Powell acknowledged last month that the economy faces “risks to both sides of the mandate.” While high interest rates are used to combat inflation, cutting rates can stimulate hiring and growth. The challenge for the Fed is deciding whether to ease policy to support a weakening job market or hold rates steady to avoid fueling inflation.
With goods prices accelerating and key industries under pressure, Apollo chief economist Torsten Slok said the “stagflation theme in markets is intensifying.” The Fed’s next moves will likely hinge on incoming data, including the July CPI report, due August 12.
