Could higher tariffs push US into stagflation mode? By Investing.com

Recent moves by President Biden to hike tariffs on $18 billion worth of imports from China, combined with former President Trump’s vow to implement a 60% tariff on China and a 10% tariff on other trading partners if he returns to the White House in 2025, have raised concerns about the potential economic repercussions.

In a note to clients this week, analysts examined these scenarios and their implications for the US economy, with a focus on the risk of stagflation—a period of stagnant economic growth and high inflation.

Analysts used a large macroeconomic model to analyze four scenarios: a “baseline” with no tariff changes, a “Biden” scenario with a 50% tariff on $18 billion of Chinese imports, a “Trump” scenario with a 60% tariff on Chinese imports and a 10% tariff on imports from other trading partners, and a fourth scenario assuming retaliatory tariffs from foreign economies.

The bank said its findings suggest that the “Biden” scenario would have minimal impact on the $28 trillion US economy, essentially mirroring the baseline scenario.

However, under the “Trump” scenario, they state that GDP growth is expected to downshift significantly in 2025, causing the unemployment rate to rise by half a percentage point. Inflation would also be higher relative to the baseline, according to the bank.

They add that the situation worsens if foreign countries retaliate. In this case, the bank projects that US GDP would contract, and the jobless rate would increase even further.

The bank explains that the growth-reducing effects stem from the impact of higher tariffs on the Consumer Price Index (CPI), which would erode real income growth and reduce consumer spending.

The bank says that although monetary policy easing could cushion the blow, the potential for greater inflation deviations could slow GDP growth more and raise unemployment rates higher than the model predicts.

Compared to the 1970s, when the “Misery Index” (the sum of the CPI inflation rate and the unemployment rate) soared from 9% in 1972 to over 20% in 1980, the bank says current projections suggest a more modest stagflationary impact.

Nonetheless, the bank concludes that significant tariff increases would still impart a stagflationary shock to the economy, though not as severe as the late 70s and early 80s.