Not all economists think that inflation or maybe stagflation, and then a bout of recession, are on the way. Many are, though, and the odds are increasing.
Adam Posen, president of the Peterson Institute for International Economics and a former official at both the Federal Reserve and the Bank of England, said in a speech, “We may get recession, we may not, but we are going to get inflation either way,” according to a MarketWatch report.
Posen is putting the odds of a recession at 65%, even if Trump does manage to make some deals with other countries, because heightened tariffs will likely stay in place.
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Posen isn’t the first or only economist who sees conditions as deteriorating. J.P. Morgan went from an estimate of a 40% recession chance at the end of March to a 50% and then 60% probability. A few days later, a team led by Bruce Kasman, a managing director and chief economist for JPMorgan, released a note titled “There Will Be Blood.”
The Richmond Fed has estimated the average effective tariff rate (AETR) has grown from 2.2% in 2024 to as much as 17% now, if all the tariffs Trump has proposed become effective.
A haunting memory of the 1970s— stagflation — has been resurfacing in financial circles for the better part of a year. Stagflation received its moniker in the 1970s, prompting President Gerald Ford to don a WIP pin, for Whip Inflation Now, to get the public to save more and increase prudence in spending. Technically, stagflation is a combination of rising inflation, high unemployment, and slow economic growth.
Underlying the growing concerns this year aren’t so much the prospects of higher tariffs, but the amount of uncertainty created by Trump’s “radically different” policies, Posen said. The result, he continued, has left U.S. key allies unsure of their relationship with the country and increased the chance that they would work together in search of protection.
Disruptions due to tariffs and other aspects of Trump’s strategies would ultimately result in shortages of important goods and services. Domestic producers could use tariffs and the impact on foreign manufacturers as an excuse to raise prices.
Should inflation spike, the Federal Reserve would have to raise interest rates quickly to reduce consumption and push prices down again. If all this happened, Posen said, it could take years to repair all the damage, direct and indirect, that would come about. The reaction could also include a recession.
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