Stagflation for the Ages

Project Syndicate: April 24, 2025

The supply-chain disruptions during the pandemic look almost quaint compared to the fundamental reordering of global trade currently underway. This fracturing, when coupled with US President Donald Trump’s attacks on Fed independence and preference for a weaker dollar, threatens a prolonged period of stagflation.

Nearly five years ago, I warned that stagflation was only a broken supply chain away. A temporary outbreak did indeed occur in the immediate aftermath of the COVID-19 shock, as a surge in inflation coincided with an anemic recovery in global demand. But, like the pandemic, that economic disruption quickly subsided. Today, a more worrisome form of stagflation is in the offing, threatening severe and lasting consequences for the global economy and world financial markets.

An important difference between these two strains of stagflation is the nature of the damage. During the pandemic, supply chains were stressed by significant demand shifts – during early lockdowns, people consumed more soft goods and fewer services, with a sharp reversal taking place after reopening. This led to soaring commodity prices, semiconductor shortages, and global shipping bottlenecks, which collectively accounted for about 60% of the surge in US inflation in 2021-22. It took roughly two years for those supply-chain disruptions to begin to fade, allowing inflationary pressures to ease.

Such temporary disruptions now seem almost quaint compared to the fundamental reordering of global supply chains sparked by US President Donald Trump’s “America First” protectionism. The United States, for all intents and purposes, is disengaging, or decoupling, from global trade networks, especially from China-centric supply chains in Asia and potentially even from the supply chains that knit together North America though the US-Mexico-Canada Agreement, the so-called gold standard of trade agreements.

These actions will reverse the supply-chain efficiencies that academic research suggests have reduced the US inflation rate by at least 0.5 percentage point per year over the past decade. This reversal, driven by America’s newfound disdain for its former trading partners, will likely be permanent. Whereas the COVID-19 turmoil had a clear end point, distrust of the US will persist long after Trump has left the scene. This time, there will be no quick or easy fix.

The reshoring of production to the US will not be seamless. Trump points to foreign and domestic firms’ outsize investment announcements as signs of a phoenix-like rebirth of US manufacturing. Yet production platforms cannot be snapped apart and reassembled like Legos (as was apparently attempted in Vietnam, below). Under the best of circumstances, these projects take years to plan and construct before gradually coming online.

But in today’s climate of extraordinary policy uncertainty, with tit-for-tat retaliatory tariffs and sanctions dangerously dependent on Trump’s whims, reshoring investments are likely to be deferred, if not canceled altogether. Nor will it be easy for the rest of the world to pick up the pieces after America’s retreat from globalization and develop new supply chains.

Just as it will take time for the US to rebuild domestic capacity, other countries’ efforts to restructure trade arrangements will be drawn out over a long period. To the extent that global value chains reflect the inherent efficiencies of comparative advantage, this reconfiguration of production, assembly, and distribution platforms threatens to add new inefficiencies that will raise costs and prices worldwide.

There is an even more insidious ingredient in this stagflation cocktail: the politicization of central banking. Here, again, the US is leading the way. Trump insists that he has the right to weigh in on the Federal Reserve’s policy actions, and has loudly and repeatedly conveyed his displeasure with the Federal Open Market Committee’s recent decisions to keep policy rates on hold.

The risk is that Trump will go even further in attacking the Fed’s independence. The president recently proclaimed that he could force out Fed Chair Jerome Powell, noting that his “termination can’t come fast enough.” While Trump has since backtracked from that threat, such a move would be consistent with his broader – and seemingly unconstitutional – push to expand executive authority. As part of this power grab, he has already taken aim at other independent agencies, illegally firing apolitical leaders of the National Labor Relations Board, the Equal Opportunity Commission, and the Federal Trade Commission for political purposes. Who’s to say the oft-volatile Trump won't flip-flop again and renew his attacks in Powell?

At a minimum, Trump is ramping up political pressure on US monetary policy precisely when inflationary pressures are mounting in the face of new supply-chain disruptions. Add to the mix Trump’s well-known preference for a weaker US dollar, and current circumstances bear a striking resemblance to those of the late 1970s, when a weak dollar and a weak Fed compounded America’s first outbreak of stagflation. Remember the clueless G. William Miller, who was Fed chair at the time? That is a painful part of my own experience as a Fed staffer that I would rather forget.

The other side of the stagflationary coin is the increasing risk of US and global recession. Again, this goes back to the growing possibility of a pervasive, long-lasting uncertainty shock bearing down on the US and global economies, and the associated paralysis of business and consumer decision-making. Trump celebrated the imposition of so-called “reciprocal” tariffs on April 2 as “Liberation Day.” To me, it was more like the ultimate act of economic sabotage, triggering retaliation and a likely decline in the global trade cycle. If this continues, it will be exceedingly difficult for the world to sidestep recession.

The outcome of Trump’s agenda could be as destructive as that of the early-twentieth-century global trade war that followed the 1930 Smoot-Hawley Tariff Act, once thought to be America’s worst protectionist policy blunder. With US tariffs now even higher than they were back then (and, in fact, higher than at any point since 1909), it is worth remembering the 65% contraction in global trade that occurred from 1929 to 1934. Today’s world might be lucky to get away with stagflation.