The Federal Reserve on Wednesday painted a picture of an economy reshaped dramatically by President Donald Trump and his economic trade policies. It warned that tariffs could significantly dampen the economic outlook, ushering in higher inflation and slower growth.
The effect of all these tariffs is to abruptly choke off Americans’ access to both affordable goods and materials from overseas. This has the effect of increasing inflation, which the Federal Reserve tracks using the Personal Consumption Expenditures price index and is now estimating could rise from its current level of 2.5% to 2.7%. According to another estimate from the Budget Lab at Yale, the new tariffs are poised to raise America’s price level by 2.3 percent in 2025 — a spurt of inflation that would cost the average US household $3,800.
At the same time, these tariffs are likely to slow growth and increase unemployment. According to officials’ latest median estimates, the US unemployment rate may hit 4.4% by year’s end, compared with the current rate of 4.1%. Facing higher costs — and deepening economic uncertainty — businesses are already saying that they plan to hold off on new investments. Consumers, meanwhile, will have less disposable income, sapping demand. This would likely lead employers to cut staff. Consequently, US gross domestic product, Fed officials predict, will grow at an annual rate of 1.7%. In December, Fed officials projected a 2.1% pace.
Typically, when economic growth slows or sputters out entirely, unemployment increases, and inflation falls. This is because weak economic growth, or an outright recession, lowers aggregate demand. When aggregate demand instead races ahead of aggregate supply, it triggers a bidding war between consumers that sends prices soaring causing economy -wide inflation. These estimates of both higher inflation and slower growth happening at the same time have sparked concerns about the dreaded “stagflation,” an economic curse that is hard to escape.
Discussion Questions:
1. What changes would shift the aggregate demand right and left, and what other changes will cause the aggregate supply curve to shift either right or left?
2. Discuss how unemployment can be caused by either a decrease of aggregate demand or a decrease in aggregate supply and determine the price-level of inflation outcome in each case.
Sources| https://www.cnn.com/2025/03/20/business/stagflation-explained/index.html; Unsplash: Photo by Jonathan Borba on Unsplash