US Inflation: The Canary in the Coal Mine for Trump's Tariffs

The U.S. economy is at a crossroads, and the upcoming inflation data could be the canary in the coal mine, signaling the pain to come from President Trump's latest round of tariffs. The tariffs, announced on April 2, 2025, are set to reshape the economic landscape, but the question remains: will they make America wealthy again, or will they plunge the country into a recession or stagflation?

The tariffs, which include a 10% universal duty on all U.S. imports and so-called reciprocal tariffs applied to imports from 90 nations, are designed to revitalize American manufacturing, create jobs, and generate federal revenue. However, economists are sounding the alarm, warning that these tariffs could accelerate inflation and dampen U.S. economic growth.

The tariffs will be paid by U.S. businesses that import goods and materials from other countries, and they are likely to pass on some or all of those costs to consumers through higher prices. This could reignite inflation, which could cause some U.S. households to back on spending. Since consumer spending accounts for about 70 cents of every $1 in GDP, economic growth could slow. Together, these outcomes could create "stagflation," a period when economic growth falters even as prices remain painfully high.

The risks of recession are also rising due to Mr. Trump's latest tariffs, according to new estimates from several Wall Street economists. If the fresh U.S. tariffs spur retaliatory measures from other nations, "serious recessions" could emerge both in the U.S. and globally, according to Mark Zandi, chief economist at Moody's Analytics. A U.S. recession would likely reduce GDP by 2% and boost unemployment next year to 7.5%, up from its current rate of 4.1%, he estimated.

The tariffs could also lead to a significant increase in inflation. Consumer prices could accelerate by 1 percentage point by year-end, boosting the inflation rate close to 4%, according to Gregory Daco, chief economist at EY. This could prove painful for many Americans, including supporters of Mr. Trump who backed his candidacy because of his promises to "end the inflation nightmare" of the post-pandemic years.

The tariffs could also have a significant impact on the long-term investment strategies of companies in sectors like Big Tech and insurance. The anticipated rise in inflation could lead to higher costs for raw materials and components, which could affect the profitability of Big Tech companies. For instance, Apple's iPhones, which are largely manufactured in China, could see a price spike due to the reciprocal tariffs, with China facing a rate of 34%. This could force companies to pass on some or all of those costs to consumers through higher prices, potentially dampening demand for their products.

In the insurance sector, higher inflation could lead to increased claims costs, as the cost of goods and services rises. This could put pressure on insurance companies to raise premiums, which could in turn reduce demand for insurance products. Additionally, higher inflation could lead to lower real returns on investments, which could impact the long-term financial health of insurance companies.

Given the potential for stagflation and recession, investors should consider adjusting their portfolios to mitigate risks by focusing on sectors and companies that are historically more resilient during economic downturns. Defensive sectors such as consumer staples, healthcare, and utilities tend to perform better during economic downturns. These sectors provide essential goods and services that consumers continue to demand even during tough economic times.

Investors should also consider allocating a portion of their portfolio to assets that can hedge against inflation, such as gold, real estate, and inflation-protected securities. Historically, gold has been a safe haven during times of economic uncertainty and inflation. Real estate investments, such as REITs, can provide a hedge against inflation as property values and rents tend to rise with inflation. Treasury Inflation-Protected Securities (TIPS) offer protection against inflation as their principal and interest payments are adjusted for inflation.

In conclusion, the upcoming inflation data could be a harbinger of the economic pain to come from President Trump's tariffs. Investors should be prepared for the potential for stagflation and recession, and adjust their portfolios accordingly. By focusing on defensive sectors and inflation-hedging assets, investors can mitigate risks and protect their portfolios during these uncertain times.