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- CICC anticipates substantial impact from Trump’s tariff hike, straining U.S. economy.
- Tariff rate surges 22.7% could spark stagflation.
- Rising tariffs pressure consumer spending, inflate prices.
On April 3, 2025, China International Capital Corporation (CICC) revealed that former President Donald Trump’s tariff policy could increase the effective U.S. tariff rate by 22.7%, impacting the economy.
This action suggests the U.S. could face stagflation, marked by higher inflation and reduced growth, complicating Federal Reserve policies.
Historical Insights Parallel 1930s Economic Conditions
CICC calculated that Trump’s trade measures would escalate U.S. tariffs from 2.4% in 2024 to 25.1%, far exceeding prior estimates. The proposed tariffs act as fiscal tightening, withdrawing funds from the private sector to the government sector. Consumer spending and investment might decline significantly due to these adjustments. Additionally, the tariffs could inflate PCE rates by 1.9 percentage points.
Major economic entities highlight the difficulty the Federal Reserve faces without the “Fed put option”. David Alcaly, Economist at Lazard Asset Management, noted, “We foresee weaker consumer spending coupled with stronger inflation, indicative of stagflation risks.” Economists like Aditya Bhave of Bank of America emphasize businesses are passing more costs onto consumers compared to previous episodes.
Did you know?
The proposed tariff hike rates are comparable to the steep tariffs of the 1930s, a period marked by both economic contraction and high inflation, providing important historical parallels.
Historically, tariffs have influenced economic growth and inflation. Past actions showed moderate inflation increases when starting levels were low. The current context, with inflation above the Federal Reserve’s target, increases the risk of stagflation. Experts cite the difficulty for businesses to absorb these costs today compared to past tariff applications, when adjustments were more manageable.
Expert analysis, supported by historical data, reveals companies now have limited capacity to manage increased costs internally, increasing the chance they will pass these costs on, driving consumer inflation expectations higher. According to a CICC Report, “Tariffs are effectively a form of fiscal tightening, suppressing consumer spending, investment, and leading to an inevitable decline in economic growth.” Consumers foresee heightened inflation and reduced economic growth, remarked economists observing these industry trends.
For further reading on similar issues, Senator Warren’s letter on tariffs and price gouging provides additional insights.
