Jamie Dimon, the CEO of JPMorgan Chase, the largest bank in the United States, and often dubbed the 'Wall Street President,' has been vocal throughout the past year about the heightened risk of the US facing a 1970s-style stagflation, characterized by stagnant economic growth coupled with surging inflation. "Considering the extraordinary amount of fiscal and monetary stimulus over the last half-decade, it's hard to dismiss the potential for stagflation," Dimon remarked at a conference in May.

Skepticism from Economic Authorities

However, his forecast has been met with skepticism from many prominent economic figures, including Federal Reserve Chairman Jerome Powell, who stated in May, "I don't see the stagflation scenario unfolding." This was prior to Donald Trump's election victory. Now, with Trump's presidency on the horizon, Americans might need to prepare for stagflation, a phenomenon the country hasn't witnessed in over fifty years, potentially triggered by tariffs.

The Tariff Factor: Trump's Economic Policy and Its Potential Impact

Just over a month from now, Trump will have the authority to impose tariffs on other countries with a simple signature. Once he takes office on January 20, he has promised to immediately enforce a 25% tariff on imports from Mexico and Canada, as well as to increase tariffs on Chinese goods by an additional 10%. There is some uncertainty about whether Trump will actually implement these plans or use them as leverage in negotiations with other nations. However, if these substantial and widespread tariffs are enacted, it could plunge the US economy into one of its most painful periods, which took over a decade to resolve.

Historical Context: The 1970s Stagflation Experience

"I experienced stagflation firsthand. It was marked by 10% unemployment, high single-digit inflation, and sluggish growth," Powell recalled in May, referring to the oil price surge during the Arab oil embargo in the 1970s. When the Fed responded to the high unemployment rates of the 1970s by lowering interest rates to alleviate pressure on businesses, it later had to deal with rising inflation. To combat this, central bankers raised interest rates, which in turn led to more unemployment. To break this vicious cycle, the Fed decided to prioritize reducing inflation by aggressively increasing interest rates, even at the risk of a recession, which eventually occurred.

Current Economic Conditions: A Comparison with the 1970s

The current US economy is not close to the conditions the Fed faced during much of the 1970s and 1980s. Although the unemployment rate has risen this year, at 4.2%, it is still two percentage points lower than the average seen over the past fifty years. Meanwhile, inflation has significantly cooled over the past two years and is now just slightly above the Fed's 2% target, making it challenging to achieve that exact level. Overall, the economy grew at an annualized rate of 2.8% last quarter, a slightly weaker pace than the previous quarter, but still impressive considering the Fed raised interest rates to the highest level in over two decades to combat inflation, which had peaked at a 40-year high two years prior.

The Inflationary Risk of Tariffs

The tariffs proposed by Trump are not inherently inflationary, according to Michael Feroli, JPMorgan's Chief US Economist. While they could certainly lead to a one-time increase in the prices of many goods that Americans purchase, similar to a sales tax hike, higher tariffs can quickly lead to a cascade of price increases if consumers expect higher inflation due to them and demand higher wages, which could result in businesses continuously raising prices. Feroli also noted that if new tariffs are imposed in a "haphazard" and "hasty" manner without giving businesses ample time to adjust their supply chains, it could significantly hinder economic growth by forcing businesses to hold back on new investments due to increased uncertainty.

Potential Retaliatory Measures and Their Consequences

Stagflation could also become a reality if other nations retaliate with tariffs on US-produced goods, potentially leading to job losses. Although Feroli believes the risk of the US economy experiencing stagflation is higher now than earlier this year, it is not the base case he and his team of economists are predicting at the moment. This is because they do not anticipate inflation to rise by more than a few tenths of a percentage point from current levels, partly because they believe the Trump administration will give US businesses sufficient time to respond to higher tariffs if they are implemented.

Economic Outlook and Policy Implications

Wells Fargo economists share a similar view with Feroli. "These tariff increases, if implemented shortly after Inauguration Day, would cause a modest stagflationary shock to the US economy, increasing our near-term inflation forecasts but also dampening our economic growth outlook," they stated in a note last month, published shortly after the election. "Should this occur, the likelihood of a stagflation scenario in our growth model would likely increase." However, they also cautioned, "There is tremendous uncertainty about future potential policies."

Conclusion: Navigating the Path Ahead

The prospect of stagflation, once considered a distant threat, now looms larger on the horizon due to the potential economic policies of the incoming administration. While the exact impact of these policies remains to be seen, the possibility of a return to the economic challenges of the 1970s has become a topic of serious discussion among economists and policymakers alike.