Why Trump’s new EU tariffs could trigger stagflation in the US economy

US President Donald Trump

US President Donald Trump’s aggressive move to slap 30% tariffs on the European Union—set to take effect on August 1—has raised alarm bells among economists who now fear the United States may be heading toward a dangerous economic scenario: stagflation. With inflation still subdued and stock markets at record highs, Trump has had little incentive to hold back on trade escalation. But this latest round could mark a turning point, the New York Times reported.

The risk of a stagflationary shock

Economists say the scale and timing of Trump’s tariffs could create the very conditions they’ve long cautioned against—slowing growth combined with rising prices. “The higher that tariffs end up being, the more stagflationary it will be,” warned Eric Winograd, an economist at AllianceBernstein.

So far, businesses have largely absorbed the cost of Trump’s trade wars or leaned on early stockpiling. But with the EU and US serving as each other’s largest trading partners, the new tariffs threaten to disrupt everything from industrial supply chains to pharmaceutical imports.

European Commission President Ursula von der Leyen has already said the levies “would disrupt essential trans-Atlantic supply chains, to the detriment of businesses, consumers and patients on both sides of the Atlantic.”

Why inflation could now start rising

Until now, consumer price growth has remained mostly in check, partly because businesses held back on price increases and drew down inventories. But with fresh imports now set to cost more, companies will face tough choices: absorb the new expenses or pass them on to consumers. Forecasts for June’s Consumer Price Index suggest inflation may begin creeping up as the full impact of tariffs reaches store shelves.

“There’s a limit to how much businesses can eat the costs,” said Ryan Sweet, chief US economist at Oxford Economics. “Eventually they’ll have to protect their margins, and that can mean cutting jobs or raising prices.”

Trump’s bet on ‘patriotic’ spending and self-reliance

The Trump administration has argued that foreign suppliers—not American consumers—will ultimately bear the brunt of the tariffs. White House economic adviser Kevin Hassett has cited falling prices of imported goods as evidence that overseas producers are absorbing the shock. He’s even claimed the data shows “patriotism,” with Americans favouring local products over foreign alternatives.

But critics point out that the steepest tariffs haven’t kicked in yet, and that companies may still be in the “wait-and-see” phase—choosing not to make big investments or staff changes until the effects are clearer.

Fed policy caught in the middle

Trump’s trade war strategy is also complicating the Federal Reserve’s next steps. With price hikes looming and business confidence shaky, Fed officials face a difficult decision: cut rates to cushion growth or hold steady to avoid fuelling inflation further. Many economists now see September or even December as the earliest the Fed might move.

“A new round of tariff increases would put the Fed in an even more difficult position,” said Kathy Bostjancic, chief economist at Nationwide. “They’ll need to balance short-term price hikes against longer-term damage to the labour market.”

How deep the damage goes

For now, the White House points to buoyant markets and strong employment data as evidence that its economic approach is working. But analysts say the real damage may just be delayed. Once inventories are depleted, businesses will be forced to confront higher import costs—and consumers could feel it at grocery stores, electronics shops, car dealerships and beyond.