Trump’s Trade Policies and Inflation Raise Stagflation Fears in the U.S.

A combination of persistent inflation and President Donald Trump’s aggressive trade policies has reignited fears of stagflation, an economic condition marked by slowing growth and soaring inflation.

According to a Reuters report on Friday (Feb 21, 2025), the potential return of stagflation—which could weigh on various asset classes—has been a recurring concern for the past 50 years but has never materialized as a serious threat to investors' portfolios. The last time the U.S. faced stagflation was in the 1970s.

"Stagflation is now a real possibility because we have policies that could weaken consumer demand, even as persistent inflation limits the Federal Reserve’s ability to maneuver," said Jack McIntyre, a portfolio manager at Brandywine Global.

"This is no longer a zero-probability scenario—not at all."

Rising Inflation Increases the Risk of Stagflation

One major factor contributing to stagflation—stubbornly high inflation—became evident earlier this year. Government data showed that consumer prices in January rose at the fastest monthly rate since August 2023, pushing annual inflation to 3%.

At the same time, U.S. economic growth remains uncertain, with Trump’s tariffs posing additional inflationary pressures that could further complicate the outlook.

"Our biggest concern right now is not just inflation, but stagflation," said Tim Urbanowicz, head of investment strategy at Innovator Capital Management.

"We already have persistent inflation, and on top of that, tariffs could slow the economy by acting as a tax on consumers, squeezing corporate profits, and hampering growth."

A Bank of America survey of global fund managers revealed that the proportion of investors anticipating stagflation—defined as below-trend growth and above-trend inflation—has reached a seven-month high.

Despite these concerns, investors remain optimistic about stocks, with the trade war perceived as a low-probability risk.

Trump Pushes New Tariffs, Investors Monitor Economic Impact

Earlier this month, Trump postponed new tariffs on imports from Canada and Mexico for one month, but at the same time, he imposed a 10% levy on all Chinese imports and announced higher tariffs on global steel and aluminum imports.

He also instructed his economic team to develop a reciprocal tariff plan for any country that taxes U.S. imports. Most notably, he recently stated his intention to introduce a 25% tariff on automobile, semiconductor, and pharmaceutical imports.

Some investors believe that the impact of tariffs on economic growth will be temporary.

"In the long run, tariffs could actually boost growth by benefiting industries that face less global competition," said Maddi Dessner, head of asset class services at Capital Group.

However, he also warned that tariffs could initially drive inflation higher.

"The reality is that tariffs fall somewhere in between these two extremes," he said, adding that tariffs are one reason Capital Group now projects the 10-year Treasury yield to rise to 3.9% over the next 20 years, up from last year’s estimate of 3.7%.

Temukan berita dan artikel lainnya di Google News