Tariffs Will Only Bring Mild Stagflation. Unless Consumers Panic.

As the global economy grapples with the fallout from President Trump's tariff policies, investors and consumers alike are bracing for a potential resurgence of stagflation. But how severe will this episode be, and what can we do to mitigate its impact? Let's dive into the data and explore the factors at play.



The Mild Stagflation Scenario

The current stagflationary environment is characterized by high inflation and weak economic growth. According to Mark Zandi, chief economist at Moody's Analytics, this is primarily the result of President Trump's tariff policies and immigration policies (Cox, 2025). However, Zandi believes that the Federal Reserve (Fed) can raise interest rates to control inflation without causing a severe recession, as it did in the 1970s and early 1980s.

To mitigate the impact of stagflation, policymakers can take several steps:

1. Address high inflation: The Fed can raise interest rates to control inflation, as suggested by Zandi. However, they must be careful not to raise rates too aggressively, as this could slow down economic growth and potentially cause a recession.
2. Stimulate economic growth: The government can implement targeted fiscal stimulus, such as infrastructure investments or tax incentives, to spur economic activity and create jobs without significantly driving up prices.
3. Manage trade policies: The government can reassess its trade policies, particularly tariffs, to minimize their negative impact on the economy. This could involve negotiating trade agreements, reducing tariffs, or finding alternative ways to address trade imbalances.

The Role of Consumer Confidence

While the mild stagflation scenario is a concern, the situation could worsen if consumers lose confidence in the economy and start panicking. This could lead to a vicious cycle of reduced spending, increased saving, and further economic slowdown, exacerbating stagflation risks.

To prevent this, policymakers can take the following measures:

1. Fiscal stimulus: The government can implement fiscal stimulus measures, such as tax cuts or increased government spending, to boost aggregate demand. This can help to increase consumer spending and reduce unemployment, which can help to combat stagflation.
2. Monetary policy: The central bank can implement monetary policy measures, such as lowering interest rates or increasing the money supply, to boost aggregate demand. This can help to increase consumer spending and reduce unemployment, which can help to combat stagflation.
3. Communication and transparency: The government and central bank can communicate effectively and transparently with the public about the state of the economy and the measures being taken to combat stagflation. This can help to restore consumer confidence and prevent panic.
4. Targeted policies: The government can implement targeted policies to address specific sectors or regions that are particularly vulnerable to stagflation. For example, the government can provide targeted support to industries that are experiencing high unemployment or inflationary pressures.



The Importance of Central Bank Policies

Central banks play a crucial role in managing stagflation risks by using monetary policy tools to control inflation and stimulate economic growth. However, their policies can also influence the severity of stagflation if not properly calibrated. Central banks must balance the trade-offs between controlling inflation and stimulating economic growth, manage inflation expectations, and communicate their policy intentions clearly and consistently to minimize the risks of stagflation.

In conclusion, while the current stagflationary environment is a concern, policymakers can take steps to mitigate its impact. By addressing high inflation, stimulating economic growth, managing trade policies, and maintaining consumer confidence, we can prevent a severe stagflationary episode. However, it is crucial for central banks to balance their policies carefully to avoid exacerbating the situation. As investors and consumers, we must remain vigilant and adapt to the changing economic landscape to navigate this challenging environment successfully.