Since President Trump took office, economists have been waiting for his policies to work their way through the U.S. economy and reveal their consequences. The soft data, mostly surveys of consumers and businesses that track how people feel about the economy, turned down sharply months ago, while the hard data — jobs, G.D.P. growth, inflation — all seemed fine. But recently, a telling series of hard economic data rolled in that has rightfully raised alarm bells about slowing growth and increased inflation — a dreaded economic combination known as stagflation.
Mr. Trump’s tariffs are now clearly fueling inflation, particularly in goods such as home appliances, cars and food. In the first six months of the year, real (that is, inflation-adjusted) consumer spending, the main driver behind business cycles and robust economic expansion, barely grew, after rising 3 percent last year. G.D.P. growth slowed by about half, to 1.2 percent this year from 2.5 percent last year. When overall growth falls that sharply, the labor market tends to follow, which is precisely what happened: Job growth, at 35,000 per month on average between May and July, is dangerously close to stall speed.
While presidents always take credit for good economic news and try to deflect bad news (in this president’s case, by firing the messenger who delivered it), it’s often hard to link what’s going on in the economy to the current administration. Not this time. Whether it’s historically high tariffs that never quite seem to stabilize, deportations that threaten to seriously disrupt labor supply in sectors like construction and health services, or a reverse-Robin Hood, budget-busting bill that takes money away from those most likely to spend it, Mr. Trump’s policies have pushed economic uncertainty to levels last seen during the onset of the pandemic. This uncertainty has damped investment, hiring and consumption, while the tariffs increase prices. In other words: stagflation.
For many American adults, the specter of stagflation may conjure thoughts of the 1970s. But if Mr. Trump’s stagflation continues to grow, it will be different in one very important way: The economic damage will be almost entirely self-inflicted. In the ’70s, stagflation was caused not by an unconstrained president but by “exogenous shocks,” meaning big, unexpected disruptions originating from events outside the country and exacerbated by the inaction of the Federal Reserve to offset them.
The biggest, and most famous, of these shocks involved the oil market. Because of the oil embargo the Organization of Arab Petroleum Exporting Countries imposed on the United States in 1973 and the Iranian Revolution in 1979, the price of oil increased more than tenfold. As a result, by 1980, the United States was spending roughly six times as much on oil as it was in 1970. That change reverberated throughout the economy and caused inflation to reach a high of nearly 15 percent by the end of the decade.
In what is now a famous horror story of monetary policy gone wrong, the Fed not only failed to respond to the rising inflationary pressures in the ’70s; it actively made them worse. The reason was in part political: Arthur Burns yielded to pressure from the Nixon White House to disregard concerns about rising inflation and keep interest rates low to hold down unemployment. (Sound familiar?) The resulting stagflation crisis ended only when a new Fed chair, Paul Volcker, raised rates to almost 20 percent in 1980, leading to a deep and painful recession.
Of course, the 1970s stagflation generated much higher inflation and unemployment rates than we have now. Back then, both rates reached double digits, whereas today they’re relatively low, with unemployment at 4.2 percent and inflation at 2.7 percent. The underlying factors driving stagflation were different, too. Today there are no exogenous shocks comparable to the oil shortage. (The price of oil is relatively low, although Mr. Trump’s assaults on clean-energy production in the middle of an A.I.-fueled power demand boom are widely expected to result in higher electricity prices for many Americans.)
And fortunately, today’s Fed is actively applying the lessons learned from the Volcker era. Although Mr. Trump constantly harasses Jerome Powell to aggressively lower interest rates — calling for an unheard-of and reckless cut of 3 percentage points — Mr. Powell and the other members of the Fed’s governing board have explicitly stressed and implicitly maintained their independence; their decisions are driven by data, not politics. Unlike their ’70s counterparts, they’re also highly cognizant of the importance of making sure consumers and businesses trust the central bank’s commitment to getting inflation back down to their 2 percent target and holding it there.
Here, too, Mr. Trump is causing his own problems, in two ways. First, if businesses that help set prices or decide wages start to believe that the Fed is yielding to Mr. Trump’s relentless pressure, they will raise prices in anticipation of higher, longer-term inflation. That will force the Fed to fight back with higher rates to restore and maintain its inflation target. Second, the combination of higher interest rates — which feed into higher mortgage, credit card and car loan rates — and higher prices will only add to Americans’ biggest complaint about the current economy: the cost of living.
Ironically, the fact that today’s nascent stagflation has Mr. Trump’s fingerprints on it is good news. The absence of exogenous shocks and the existence of a highly competent central bank suggests to us that his destructive policy agenda could be reversed, although time is running out. Were Mr. Trump to declare victory and end his trade war, the stagflation outlook would meaningfully diminish. Consumers and workers would quickly see their prospects improve. But if anything, Mr. Trump appears to be doubling down.
In both its causes and its symptoms, what we’re experiencing isn’t your father’s stagflation. With Mr. Trump running the show, there’s an uncomfortably high chance that it’s going to be yours.
Jared Bernstein is a distinguished policy fellow at the Stanford Institute for Economic Policy Research, where Ryan Cummings is the chief of staff.
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