In 1965, UK Conservative MP Iain Macleod (1913-1970) warned the House of Commons of the unusual torment dogging the UK economy. He cautioned the country faced the ‘worst of both worlds – not just inflation… or stagnation… but both’. He described this mix of menaces as ‘stagflation’.

With that, Macleod invented the word that best described the double-digit inflation and low, often negative, economic growth and associated high unemployment of the 1970s.

Expect to endlessly hear about stagflation. US President Donald Trump has implemented an economic shock in the form of tariffs. He has raised these taxes from an average 2.5 per cent to beyond 15 per cent. The level could rise, if Trump doubles tariffs on EU goods to 50 per cent and he reimposes taxes of 145 per cent on Chinese imports.

While courts have blocked key tariffs after rejecting Trump’s reasoning based on certain doctrines and laws – though they were reinstalled on appeal, he can cite other laws to keep his tariffs in place and would most likely do so.

The poison of tariffs is they simultaneously boost inflation and damage economic growth. The harm is magnified because some countries are imposing retaliatory tariffs and Trump is generating much uncertainty by implementing fluctuating tariffs on an indebted and stalling US economy that has barely beaten pandemic inflation.

Despite Trump’s claim businesses and China will ‘eat’ the cost, tariffs are a one-off increase in prices on imported goods that cascade through economies. Many expect US inflation to catapult beyond five per cent.

The blow to US economic growth from tariffs (and other Trump policies) is likely to be harsh – Goldman Sachs places a probability of 35 per cent on a US recession this year, while others have higher percentages. US consumer confidence has plunged since Trump reassumed the presidency. Such gloom and the financial hit from tariffs curb the consumer spending that drives 70 per cent of US output.

Business confidence has dived as tariffs force companies to accept tighter margins or pass on their cost to customers, which reduces demand. The tariffs isolate US companies from international trade networks, especially those involving China, which means interrupted production that leads to delays and shortages and higher costs. Citing reduced margins and loss of predictability, companies are hesitant to invest and hire and warn of higher prices.

Infected economies will find that stagflation is hard to defeat, especially if consumer inflation expectations jump – in the US, they have leapt to their highest since 1981. The curse of stagflation is it ruins the policymaker trade-off between inflation and unemployment.

To combat inflation, central banks normally raise interest rates. But that would worsen unemployment. The opposite happens if central banks cut rates to fight stagnation; inflation would surge. Fiscal policy is likewise bedevilled, before factoring in that governments are too indebted to spur economies. Washington’s fiscal deficit at seven per cent of GDP and its debt at 122 per cent of output already worry investors and credit rating agencies.

That the US and other advanced countries could writhe under stagflation has consequences. One is the political fallout when stagflation pushes macroeconomic policy towards the boundaries of what societies can tolerate. The conundrum for policymakers is they must choose to tackle half the problem and then inflict harsh remedies to even achieve that.

In the 1980s, to escape the inflation side of stagflation, the Federal Reserve raised the key rate so much – to 20 per cent – it triggered two recessions (to make it four in the 13 years to 1982) and the jobless rate climbed to a then post-Depression high of 10.8 per cent. But if policymakers succumb to the bigger political temptation to attack unemployment, inflation could gallop towards double-digits.

A second consequence of stagflation is that central banks will come under pressure to tolerate inflation above their targets of around two per cent. Their independence will be politicised.

More central banks might be forced to do what the Fed did in 2020 when it scrapped an inflation ceiling of two per cent for an average target of two per cent. That meant the Fed can let inflation exceed two per cent ‘for some time’.

Or central banks might formalise the trade-off between inflation and unemployment by targeting nominal GDP, the dollar value of an economy’s output before it’s adjusted for inflation. Central banks might, say, target five per cent for nominal GDP, which means inflation could rise as high as that if GDP is flat. They could let inflation exceed that level if the economy was contracting.

Or politicians could just reassume control of monetary policy. This could happen via Trump-style bullying, tearing up independence agreements or by appointing ciphers to lead central banks.

A third risk of stagflation is governments might resort to radical steps. Could we see price and wage controls as Richard Nixon imposed? Trump’s just-announced price controls on pharmaceuticals say yes. Could circumstances arise that prompt countries to engage in currency wars or impose capital controls? Any US decision to restrict capital flows would make it harder for Washington to fund its fiscal deficits and destabilise the US-dollar-based global financial system.

A fourth scourge of stagflation is poor investment returns. For bonds, faster inflation lowers prices (boosts yields) by raising the prospect of rate increases and reducing the real value of future bond payments. For stocks, higher inflation and a struggling economy reduce the present value of the company earnings that determine valuations. For property, stagnation reduces occupancy rates and prevents the rent increases that propel returns. Cash returns might struggle to keep up with inflation. Such sub-par investment outcomes reduce investor income and stifle economic growth.

Needless to say, meagre or negative real US investment returns will go global. Stagflation is coming, most pointedly to the US. The misery will spread everywhere and endure.

The biggest caveat here is the uncertainty stemming from legal battles over tariffs might lead to a downturn that is harsh enough to smother second-round inflation and stagflation is thus fleeting. Countries that are not imposing retaliatory tariffs face stagnation not stagflation. Hence their central banks can and are cutting interest rates. The term stagflation covers mild to extreme outcomes. It might stay mild.

But Trump is upending the world trade system so quickly, he could unleash something that surpasses stagflation in terms of misery.

If the worst-possible outcomes were to eventuate, someone might need to coin a word to describe the menace of the 2020s.