Critics of President Donald Trump’s trade agenda have warned that his introduction of punishing new tariffs will cause prices to surge, reigniting the inflation that he swore he’d crush in the White House. But some economists say that higher prices from new levies pose a major threat to another of his signature promises: unlocking economic growth. “To the extent that you really do have a big tariff shock, I think it’s odd to worry about the inflationary impact,” said Jason Thomas, the head of global research and investment strategy at The Carlyle Group. If the tariff is “sufficiently large, you’re likely to dent spending to an extent that — within three to six months — the Fed is more likely to cut rates than raise rates.” In other words, tariff-related sticker shock runs the risk of hammering consumers to a point where the economy falls into a slump. Trump insists that a policy mix of tariffs, tax cuts, deregulation and lower energy prices will unleash economic growth and Make America Wealthy Again. But consumers are still sensitive to high prices — it was the primary political vulnerability identified in a recent, favorable CBS News poll — and a trade policy-induced downturn would pose a serious peril to his agenda. It would also create challenges for Federal Reserve Chair Jerome Powell — who is scheduled to testify at Senate Banking this morning — as he charts a course for the central bank to lower interest rates. It’s taken longer than expected for inflation to fall back in line with the Fed’s annual target of 2 percent. Investors are pricing in higher inflation in the near term — a reflection of Trump’s tariff plans — and Goldman Sachs analysts have told clients that their baseline case is that trade policy will keep the core personal consumption expenditures index at about 2.6 percent through the end of the year (It could climb higher if more tariffs are announced). Powell has been loath to offer any thoughts on how Trump’s agenda will affect inflation or employment, but aggressive trade policies may force the Fed chief to react to an uncomfortable combination of higher price levels and lower growth. The president on Monday directed a 25 percent tariff on all steel and aluminum imports, an echo of first-term policies that boosted the domestic metals industry but drove up prices for manufacturers. The 10 percent tariffs on Chinese goods that Trump dubbed an “opening salvo” are in effect. New “reciprocal” tariffs – which would raise rates on imported goods to equal foreign levies — are expected later in the week. Given Trump’s campaign pledge to impose tariffs as high as 20 percent on all imports, more could be in the pipeline. Their ultimate effect on prices will depend on duration and retaliatory actions but, at a certain point, a barrage of policy-related spikes could push consumers past their breaking point. Thomas said the effects could be similar to what occurred in Japan when consumption taxes climbed from 5 percent to 8 percent in 2014; consumer spending sank and growth slowed to a crawl. Japan’s economic circumstances are radically different from those of the U.S. in 2025. Japanese economic policymakers were struggling to address a long period of deflation, rather than inflation, and the challenges posed by its aging population were much more acute than what the U.S. faces. Still, the consequences of that one-off shock merit consideration as Trump weighs new tariffs. “We’ve just become so sensitized to inflation because of its role in the campaign — and its salience in our lives — that we stopped analyzing what these sorts of one-time price shocks do to spending,” Thomas said. It’s TUESDAY — For econ policy thoughts, Wall Street tips, personnel moves or general thoughts, email Sam at ssutton@politico.com.
| 
