Trump’s Tariffs and Stagflation: Why and How both Inflation and Recession can Coexist within the Same Timeframe

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Many Economists see a period of both Inflation as well as Recession for the US economy in the months ahead- two scenarios at opposite ends of the spectrum of possibilities for an economy. This is a situation which they call Stagflation- a stagnant but also inflationary economy.  In this post we explain why, how Stagflation happens and the sequence of events.

The flow chart above together with the notes below explains how the US Administration’s trade war tariffs can lead to stagflation: 

• The process starts at the top with the implementation of high tariffs (Tariff Policy).

• This leads to higher import costs, which in turn causes higher prices for goods—resulting in inflation.

• As prices rise, consumers cut back on spending, which reduces corporate earnings.

• Lower earnings force companies to lay off workers, increasing unemployment.

• The combination of reduced spending and higher unemployment leads to a recession or stagnation.

• At the bottom, both persistent inflation and recession converge, resulting in stagflation.

This step-by-step sequence shows how a supply shock from trade policy can trigger both inflation and recession, creating stagflation. 


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