Worse Than a Recession? Trump's Tariffs Risk 'Self-Inflicted' Stagflation

President Donald Trump’s turbulent tariff agenda, combined with mass deportations and increased national debt, has created heightened volatility in financial markets. Though many economists say there’s low risk of a job-loss recession, others say we’re at a critical crossroads, as consumer sentiment sours and the labor market sputters. 

Some analysts have even posited that the economy could be circling the drain toward stagflation, a rare and toxic scenario of slowing growth and high inflation. In the 1970s, stagflation — a combination of inflation and stagnation — was a major economic crisis characterized by double-digit inflation, steep interest rates and soaring unemployment.

In a June study by Apollo Global Management, chief economist Torsten Sløk warned of ongoing stagflationary risks. “Tariff hikes are typically stagflationary shocks — they simultaneously increase the probability of an economic slowdown while putting upward pressure on prices,” Sløk wrote. “The current tariff regime increases the chance of a US recession to 25% over the next 12 months.” 

Stagflation is considered to be an even worse economic prognosis than a typical downturn, as the government lacks effective policy prescriptions to control it. “There may not be an easy path to monetary or fiscal stabilization,” said James Galbraith, economics professor at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin.

US households, already struggling to afford the high cost of living, are preparing for what’s next. Whether we’re headed for a recession or a period of stagflation, taking steps to proactively safeguard your finances becomes all the more critical.

Are we still at risk of a recession?

Rampant economic uncertainty often triggers recessionary conditions as companies and households start to reduce spending and investment. During a recession, unemployment goes up, and the prices of goods begin to decline. It’s generally harder to obtain financing, as banks tighten their requirements to minimize their risk of lending to borrowers who may default on loans. 

The economy regularly experiences periods of booms and busts, with downturns occurring roughly every five to seven years. “We are due for a reset and a slowdown in the economy,” said Greg Sher, managing director at NFM Lending. 

Certain macroeconomic hallmarks, like shrinking GDP and rising joblessness, are consistent across all recessions. But every US recession is also unique, with a different historical trigger. The Great Recession of 2007-09, which kicked off with the subprime mortgage crisis and the collapse of financial institutions, was the longest. The COVID-19 pandemic recession, resulting from lockdowns and the loss of 24 million jobs, was the shortest recession on record.

Working-class and middle-class households experience the day-to-day hardship of a recession well before the National Bureau of Economic Research makes the official call. Folks on the margins also experience a much slower recovery after a recession is declared to be over. 

Relying on hard data like GDP and employment to determine recessions is faulty. Because those figures are backward-looking, they tell us where the economy was before, not necessarily where it’s heading. Many economists note that unemployment is worse than what the headline figures report. 

Here are some of the key warning signs of a recession:

Could we be facing stagflation?

Stagflation would mean having less purchasing power as prices go up and saving becomes more difficult. Jobs become harder to find, investments might take hits and interest rates could rise. Stagflation is typically measured by the “misery index,” the sum of the unemployment rate and the inflation rate, reflecting the level of economic distress felt by the average person.

For decades, experts didn’t believe stagflation was possible because it goes against basic principles of supply and demand. Usually, when more people are out of work, prices go down because demand for goods and services is lower. 

But stagflation began to rear its head in the 1970s. Growing government debt, fueled by military spending on the Vietnam War, sent prices soaring. Soon after, the energy crisis hit. In 1973, OPEC’s oil embargo resulted in a massive supply shock, worsening inflation and depressing output. 

Official unemployment peaked at 9% while inflation kept ratcheting higher and eventually surpassed 14% year over year. A second oil supply shock in 1979 prompted the Federal Reserve to raise interest rates to record highs, above 20%. While that approach worked to bring inflation down, it prompted a severe recession. 

Most economists say the likelihood of entering a period of stagflation is still quite low, but others like Sløk warn that Trump’s trade policies could fuel the fire. At the same time, the dollar and the balance sheets of major financial institutions are in a much stronger position than in the 1970s.

What role do tariffs play?

Since February, new import taxes have been announced, delayed, raised and reduced in quick succession. If tariffs are eventually implemented as announced, the average rate on US imports will be the highest in a century, back to the levels last witnessed during the Great Depression. 

Tariffs, which are import taxes on goods from another country paid by the importer, can have a similar effect to oil supply shocks, causing widespread disruptions and cost increases along supply chains. Companies either pass on those increases to domestic customers, triggering more inflation, or they cut back on investments and output, leading to layoffs and weakened growth. 

“Big tariffs right now wouldn’t just make inflation worse — they could set off a chain reaction of economic trouble that central banks and governments aren’t ready to handle,” said Sher. According to Sher, there’s a misguided assumption that consumers will be willing to pay the higher cost of goods brought on by tariffs. “Consumers will be more likely to sit on their hands and stop spending, which will further stoke the recession flames,” said Sher. 

There are signs that tariff-related uncertainty is causing cracks in the labor market. Even as unemployment remains relatively low, currently at 4.1% according to the Bureau of Labor Statistics, hiring has slowed and those currently out of work are finding it nearly impossible to find gainful employment.

Is there a solution to stagflation?

There’s an established, if imperfect, playbook for diminishing the impact of a recession. The Fed, which is in charge of maintaining price stability and maximizing employment, usually lowers interest rates to stimulate the economy and buoy employment during a downturn.

When inflation is high, however, the Fed typically raises interest rates to combat price growth and slow down the economy by making credit and borrowing more expensive for consumers and businesses. The two approaches can’t be taken simultaneously. 

“While prices are on the firm side and growth has cooled from a too-warm pace, unemployment remains closer to historic lows than not,” said Keith Gumbinger, vice president at housing market news site HSH.com. “We don’t have stagflation per se, at least as yet.” 

Gumbinger said stagflation is more intractable than a recession. It has a trickier path because the go-to policies used to address one problem often worsen the other. 

Right now the Fed is in a bind. Lower interest rates can boost a weaker economy, but they can also stoke inflation. If inflation remains sticky, the central bank is more likely to continue pausing rate cuts. The president’s habit of making knee-jerk policy announcements, only to delay or reverse them weeks later, makes it even harder for policymakers to course correct. 

That kind of government paralysis could drag out economic hardship, especially for the most financially and socially vulnerable populations. While the average recession lasts about 11 months, the last bout of stagflation in the US lasted more than 10 years.

If a recession or stagflation materializes, it would be a “self-inflicted” injury resulting directly from US government policy, said Kathryn Anne Edwards, labor economist and independent policy consultant.

How can you prepare for an economic downturn? 

Stagflation could feel like a recession with the added pain of high prices, making it difficult to prepare for and even harder to navigate. Still, experts say you’ll want to take some of the same steps you would ahead of an economic downturn. 

Establish your emergency fund. Having an emergency fund is a good idea in any economy. During an economic downturn, high unemployment can make it harder to get back on solid financial footing if you have a sudden expense. If your savings cover at least three to six months of living expenses, you can more easily weather a financial storm without relying on credit cards or retirement savings.  

Make a financial plan. Focus on paying down debt, particularly high interest credit card debt, so you don’t have to carry a balance when times are tougher. Postpone making any major purchases that overstretch your budget and that you’ll regret having to pay off in a year or two. Avoid panic buying things like laptops, phones or cars just to get ahead of expected price increases. 

Review your investments. Given the level of economic uncertainty, expect the stock market to have more volatility. If you mostly have high-risk investments, consider diversifying with a variety of low-risk accounts, or combining stocks and bonds. Consult with an adviser about inflation-resistant assets and having a more balanced portfolio based on your individual risk tolerance, age and financial goals. 

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