President Trump has had little reason to scale back his global trade war ambitions with inflation subdued, unemployment stable and U.S. stock markets back to record highs.
But the latest escalation, including 30 percent levies on the European Union, could deliver a much more painful blow to the United States. If the tariffs go into effect on Aug. 1, it could unleash the sort of devastation to consumers and businesses that economists have long worried about and Mr. Trump has mostly avoided. Their fear stems from the specter of a stagflationary shock, in which inflation intensifies as growth stalls.
“The higher that tariffs end up being, the more stagflationary it will be,” said Eric Winograd, an economist at the investment firm AllianceBernstein.
Tariffs have already had an impact on the economy in a number of ways, and the levies now threatened against the European Union risk causing even more painful disruptions, given that the bloc and the United States are each other’s largest trading partners.
Ursula von der Leyen, the president of the European Commission, said in a statement that Mr. Trump’s latest tariffs “would disrupt essential trans-Atlantic supply chains, to the detriment of businesses, consumers and patients on both sides of the Atlantic.”
So far, businesses have been able to mitigate some of the impact of Mr. Trump’s levies. To get ahead of the tariffs, they stockpiled products earlier this year, causing imports to surge before later crashing down. Americans have grown less confident about the economy as uncertainty surrounding Mr. Trump’s policies have frozen businesses in place.
Many businesses have held off on raising prices as they whittle down their inventories or chosen to absorb some of the higher costs to avoid deterring customers already choosier about how they spend. That has helped keep inflation relatively muted in recent months.
However, price pressures are expected to start heating up as a result of tariffs, according to forecasts for June’s Consumer Price Index report, which will be released by the Bureau of Labor Statistics on Tuesday.
Businesses across the country have also held off on making big changes to their work force while delaying costly, long-term investments for the time being.
What has resulted is an economy that appears to still be in solid shape, even as it shows clear signs of slowing down.
That resilience has only emboldened Mr. Trump, who has proclaimed in recent weeks that stocks are rising, and federal revenues are growing, all in the months since he first announced, then paused, many of his withering tariffs.
“Look at our numbers,” Mr. Trump said in the Oval Office on Monday. “The economy is very strong.”
The president and his top aides long have brushed aside economists’ warnings about the future damage that might result from his agenda, alleging that those predictions had been wrong in the past.
Many of those experts’ projections have always wagered that prices could rise and businesses could shed jobs starting this summer, once tariffs have been in place for a few months. But Mr. Trump has pointed to the current calm as evidence that their doomsday scenarios were overblown, despite the fact that his steepest levies have yet to take effect.
“We haven’t seen it in the data, and it’s been long enough,” Kevin Hassett, the director of the White House National Economic Council, said Monday during an appearance on CNBC.
Mr. Hassett repeated the administration’s widely held belief that foreign producers, rather than American businesses and consumers, will shoulder the real costs of the president’s tariffs.
Contrary to many economists’ views, the White House appears to believe that suppliers from overseas cannot afford to lose access to U.S. markets and customers and would absorb the shock accordingly.
Mr. Hassett pointed to the White House’s own recent research, which showed that the price of imported goods had fallen this year faster than the price of all goods since February.
Some experts have questioned that report and its methodology — and pointed out that many of Mr. Trump’s steepest tariffs haven’t kicked in yet, obscuring the full impact of the president’s trade war.
But Mr. Hassett said the findings showed instead that the concerns about inflation are overblown. He explained there was also “patriotism in the data.” The demand for some imports has “gone way down,” he said, as Americans buy more locally. Mr. Hassett added: “We’re six months in to an experiment that’s working exactly the way” the White House had anticipated.
But economists warn it is just a matter of time before tariffs, if they take effect at the levels Mr. Trump has threatened, start to bite.
“It is a tax first and foremost, a tax on corporate earnings,” said Steven Blitz, chief U.S. economist at GlobalData TS Lombard.
At some point, businesses will exhaust their stash of goods, meaning they will have to import new supply at higher prices. That will force companies to make tough choices, deciding between passing along those costs to their customers or finding other ways to cut back to stay profitable.
“Business are absorbing some of the tariffs but either way the economy will be hurt by tariffs,” said Ryan Sweet, chief U.S. economist at Oxford Economics, a forecasting firm. “If businesses eat more than expected they will find ways to cut costs to protect profit margins, putting cutting workers or hours on the table.”
Mr. Sweet estimates that the current mix of agreements and renewed tariff threats puts the effective tariff rate just under 20 percent. That is below the level the president initially tried to push through in April before financial markets seized up, but it is above what was expected just a couple of weeks ago. And that estimate assumes Europe is able to negotiate down from Mr. Trump’s threat of 30 percent tariffs.
Before the latest tariff broadside from Mr. Trump, which Wall Street has more or less shrugged off on an assumption that deals will be reached, officials at the Federal Reserve expected the economic impact of tariffs to become much more pronounced this summer. That specific date has fluctuated as the policies have shifted, but it ranges from June to as late as August or September.
That has further muddied the outlook for when the central bank will next be able to lower interest rates, prompting the president to berate the Fed and its chair, Jerome H. Powell, again on Monday for keeping borrowing costs unchanged.
Like the officials themselves, economists are extremely divided on when the Fed can move on from its current wait-and-see stance, which has kept interest rate cuts at bay since January. Many have penciled in a September start, but others believe the Fed will be forced to stay on hold until December or later, a delay that is likely to put the central bank even more in the cross hairs of Mr. Trump.
“A new round of tariff increases would put the Fed in an even more difficult position as it weighs how much to look through the tariff-induced rise in prices since officials believe it will be temporary, versus deciding to cut interest rates to offset the negative hit to the labor market and the economy,” said Kathy Bostjancic, chief economist at Nationwide.
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
Tony Romm is a reporter covering economic policy and the Trump administration for The Times, based in Washington.
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