As US edges closer to stagflation, economists blame Trump policies | US economy

The current state of the US economy is increasingly being scrutinized as signs of stagflation—stagnation coupled with inflation—appear on the horizon. The term, which conjures past economic struggles from the 1970s, is drawing renewed attention as inflation rises, job growth stagnates, and consumer confidence wavers. Over the past year, former President Donald Trump’s policies, particularly his tariffs and immigration crackdown, have become focal points in discussions around the current economic model.

Understanding Stagflation

Stagflation refers to a unique and challenging economic scenario where growth is stagnant but prices continue to rise. This phenomenon poses a dual threat to policymakers since traditional economic remedies like interest rate cuts may not effectively address both unemployment and inflation simultaneously. The conditions for stagflation are evident as inflation bounced back to an annualized rate of 2.9% after a series of early-year declines, while hiring and economic growth have stagnated.

The Trump Administration’s Impact

The early indications of economic recovery in spring were misleading. Despite promising job growth and declining inflation, recent labor market data unveiled a stark revision, showing that new job additions were continuously underestimated. Trump’s tariffs, which were initially dismissed as negligible, have started to burden consumers significantly. With Goldman Sachs estimating that consumers have already absorbed 22% of the tariff costs, the full impact is anticipated to reach as high as 67% if these tariffs remain in place.

Compounding this issue is the administration’s strict immigration policies. By reducing the labor pool, these policies have increased hiring costs and restricted economic opportunities, contributing to stagnation in growth. As fewer workers are available, employers are faced with rising costs, which are inevitably passed down to consumers, thus exacerbating inflation.

Federal Reserve Dilemmas

The Federal Reserve, led by Jerome Powell, faces a complicated balancing act amid these conditions. In his recent speeches, Powell has underscored a “shifting balance of risks” in the labor market, which has seen both supply and demand slow. The Fed’s ability to adjust interest rates effectively is compromised in a stagflation scenario, where traditional strategies may not yield favorable results.

Although the Fed may consider lowering interest rates to bolster the labor market, this comes with the risk of igniting inflation further. Historically, when inflation spiked to 9.1% in the summer of 2022, rate hikes were implemented, which did reduce inflation but also resulted in increased unemployment as businesses adjusted to the new economic reality.

What Lies Ahead?

As stagflation concerns loom, economists have mixed forecasts on the immediate future. Some analysts argue that while the economy is experiencing slower growth, indicators do not yet point to a definitive stagflation. However, several factors, including tariffs and labor market constraints, suggest that the risk of stagflation continues to escalate.

The prospect of increased poverty due to tariffs, estimated by the Yale Budget Lab to potentially push an additional 650,000 Americans into poverty, also raises alarms. The economic landscape may not only hinder job seekers but potentially worsen inequality among already vulnerable populations.

Wider Implications and Public Response

Public sentiment mirrors this uncertainty, as many Americans express concern about rising costs and job availability. While Trump’s administration continues to project optimism, portraying data as “rigged” against them, the tangible impacts of tariffs and labor shortages on everyday life cannot be ignored.

Analysts believe that if the trend continues without rectification, more consumers will struggle under the weight of inflated prices and an insufficient job market, leading to potential societal discontent. The challenge for the current administration lies in restoring confidence and ensuring that economic policies cater not only to growth but also to stability and equity.

Conclusion

As the conversation around stagflation intensifies, the intersection of Trump-era policies and contemporary economic challenges presents a compelling case for scrutiny. While the current indicators do not confirm a full-blown stagflation scenario, the apprehension surrounding rising inflation and stagnating job growth remains profound. Policymakers must tread carefully as they implement strategies to address these complex economic issues—balancing the need for growth with the realities of inflation, job availability, and consumer welfare. Only through insightful and equitable policy can a sustainable economic path be forged in the face of these mounting challenges.

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