Consumers and Businesses Anticipate Higher Prices Amid Trump’s Tariffs
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A series of recent U.S. data indicating resurging inflation and sluggish activity is fueling concerns that the world’s largest economy may be heading toward a period of stagflation. Consumer spending fell the most in nearly four years in January after a robust holiday season. Americans are becoming more pessimistic about economic prospects. Businesses are warning of higher prices in the wake of the Trump administration’s aggressive tariff policy.
U.S. Economic Data Suggests Weaker Future Growth
Economists caution against placing too much emphasis on one month’s data, especially when distorted by factors like freezing weather. However, if the risk of stagflation—when an economy faces tepid growth and elevated inflation—materializes in the coming months, the Federal Reserve would face a tough choice between supporting the job market or continuing its years-long fight against inflation. “There’s a slight whiff of stagflation in the air,” said Gregory Daco, chief economist at EY. But “we’re not there yet.”
“Developments, especially in the past week, have shown that sentiment measures are weakening, spending is also weakening, and inflation fears—at least inflation expectations—are rising,” he said.Much of the blame for the sour mood is being placed on President Donald Trump’s economic agenda. This includes punitive tariffs on the country’s biggest trading partners and his promise to make large cuts to public spending—a move that has led to layoffs among federal workers. So far, the most troubling signs come from surveys of expectations and sentiment.
A consumer confidence indicator fell in February by the most in nearly four years, reflecting a broad-based decline across all age and income groups. Inflation expectations for the next year rose to the highest level since 2023, reflecting the recent jump in egg costs, as well as higher prices anticipated from Trump’s planned tariffs.
Business activity, meanwhile, expanded this month at the slowest pace since September 2023, dragged down by the services sector, while retail sales fell in January by the biggest drop in nearly two years. And the latest GDPNow forecast from the Atlanta Fed shows economic activity contracting in the first quarter—though the initial estimate is subject to swings in the coming months.
“If consumer sentiment falls, at some point you start worrying that consumption is next,” said Ajay Rajadhyaksha, global chairman of research at Barclays Plc.
GDP Forecast Falls
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Large and small companies are also sounding alarms about what’s ahead. Ford Motor Co. CEO Jim Farley said proposed 25% tariffs on Canada and Mexico would “blow a hole” in the U.S. auto industry. And Chipotle Mexican Grill Inc. warned about potential tariffs on foods like avocados and limes.
Meanwhile, smaller companies reported freezing expansion plans, raising prices, and concerns about their profits. Nearly 60% of U.S. adults expect Trump’s tariffs to lead to higher prices, according to a Harris Poll survey conducted for Bloomberg News. This aligns with Arin Schultz, director of growth at Naturepedic, which manufactures organic mattresses in Cleveland, Ohio. The company just had its best year amid strong consumer demand, but new tariffs on material sourced from abroad would have an impact. His appeal to the new administration: exempt taxes on materials that aren’t economically viable to be made in the U.S.
“A reasonable amount of our components simply aren’t made in the U.S. Even if they were, I think the cost of getting everything here domestically would raise our costs,” Schultz said.
Impact on the Fed
Treasury yields have fallen sharply from this year’s peak, reached shortly before President Trump’s inauguration on January 20, and bond investors have started pricing in that the Fed will have to stop worrying so much about inflation and start worrying more about growth.
Fed officials are beginning to acknowledge the possibility that growth may falter while inflation remains high. Such a situation has long haunted central bankers, who seek to keep prices under control and maximize employment. It pits these two goals against each other: lower rates to support the job market risk stoking inflation. Keeping rates high to choke off price growth, however, and the economy could fall into recession.
If history is a guide, the Fed would act aggressively to control prices and future inflation expectations. In the 1970s and 1980s, this meant raising interest rates to frighteningly high levels that, in turn, increased unemployment and caused much economic pain.
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This time, the Fed cooled inflation substantially without causing a recession, largely because inflation expectations remained low. With them rising now, the Fed may be forced to keep borrowing costs high even if weaknesses emerge in the economy.
“They may have been slow on the uptake of rate hikes this last time, but stagflation is a whole different game for the Fed,” said Diane Swonk, chief economist at KPMG. “They can’t allow something like that to take hold.”
Trump promised that his combination of lower taxes, deregulation, and higher tariffs would unleash a wave of investment across the economy. Trump’s pick to chair the White House Council of Economic Advisers, Stephen Miran, told lawmakers on Thursday that the country can have a “fabulous economy” even with high tariffs. But, for now, businesses are concerned.
“If prices go up for us, prices go up for our customers,” said JD Ewing, who runs office furniture wholesaler COE Distributing, based in Pennsylvania.