UCLA forecasts 'stagflation-lite' economy with higher inflation and unemployment

"(Mariusz - stock.adobe.com) The U.S. economy will be hampered by the Trump administration's tariffs in the coming months, which along with interest rate cuts could lead to a "stagflation-lite" scenario of modestly elevated inflation and unemployment, according to the UCLA Anderson Forecast released Wednesday. The fourth-quarter estimate also predicts that rising layoffs could lead to a recession, and if President Trump is successful in exerting more control over the Federal Reserve, a "full blown stagflation scenario becomes a more significant risk.""

""This forecast is being produced at a time when more extreme scenarios have become increasingly plausible, even though they do not yet represent our baseline outlook," states the report by Clement Bohr, senior economist at the forecast. UCLA's report notes that the labor market "deteriorated notably" in June while inflation pivoted away from a path of "gradual normalization" onto a rising trajectory."

"The quarterly forecast does not take into account the government shutdown that began Wednesday that could results in thousands of layoffs, but predicts third-quarter GDP growth will come in at just 1% on a seasonably adjusted basis, and it will weaken further as the full cost of the tariffs takes hold. It expects growth to recover in the middle of next year and reach 2% by the fourth quarter, remaining there throughout 2027."

U.S. tariffs and interest-rate cuts could produce a "stagflation-lite" scenario with modestly elevated inflation and unemployment. Rising layoffs raise the risk of a recession, and increased presidential influence over the Federal Reserve could elevate the chance of full-blown stagflation. The labor market deteriorated notably in June while inflation shifted from gradual normalization onto a rising trajectory. Short-term GDP growth is projected near 1% in Q3 and is expected to weaken as tariff costs accumulate, with recovery toward 2% by Q4 of next year and growth remaining around 2% through 2027. The effective tariff rate is roughly 11%.

Read at Los Angeles Times