Recent data from the US showed that the American economy could be heading towards a period of stagflation. A report by Bloomberg said that the consumer spending declined sharply in January in the US, clocking its largest decline in almost four years. This indicated the consumer confidence waning and increase in pessimism about the economic outlook, the report said.
Stagflation marks a period of slow growth and high inflation for an economy. The report noted that several surveys indicated a surge in inflation expectations triggered by escalating costs of essential goods and the projected impact of tariffs imposed by the US administration under President Donald Trump.
Trump’s Tariff Policies
Several factors are indicating this trajectory for the US economy going forward. Majority of the economic pressures are being attributed to the Trump government’s aggressive tariff policies. As such, companies across industries have cautioned that these tariffs could end up disrupting the supply chain and increase production costs.
Jim Farley, CEO, Ford Motor, warned that the proposed 25 per cent tariff on Canada and Mexico could have a detrimental effect on the American auto industry, the report said.
Also Read : Pakistan Fails To Meet Tax Collection Target, Shortfall Widens To PKR 606 Billion In July-Feb: Report
Consumer Confidence At Major Low
The consumer sentiment in the American economy has slumped, with confidence levels crashing to their biggest declines in almost four years. If this trend is allowed to continue, it could have a negative impact on spending, deepening the economic slowdown. Meanwhile, the report noted that businesses have started to postpone their expansion plans amidst surging prices and mounting concerns about profitability.
Federal Reserve
Meanwhile, the Fed is facing a grave challenge of balancing the inflation with economic growth. Typically, central banks have actively hiked interest rates to manage stagflation, however, this approach could end up risking the economic growth and push unemployment further. On the flip side, reducing key rates to help economic growth could escalate inflationary pressures. Therefore, the challenge remains for Fed authorities to seek an approach keeping a balance on both ends and also fight stagflation.
However, the report noted that economists have expressed caution against overreacting to just one month’s data. This data could have been impacted by several factors such as extreme weather and therefore, it needs to be monitored for a while.
