Stagflation, Strategy, and Uncertainty: The Global Fallout of US Economic Policy Reversals

The current moment in global economic policymaking is marked less by direction than by dissonance. Nowhere is this more evident than in the US, where the return to tariff-based policy in early 2025 has underscored the contradictions at the heart of its economic agenda. Yet just as markets and policymakers began to absorb the implications of a more protectionist stance, Washington has partially reversed course—modifying or delaying some of the proposed measures. However, this retreat, rather than offering clarity, has only deepened global uncertainty, complicating the outlook for inflation, growth, and international cooperation.

Forecasts reflect this disorientation. Across major economies, expectations for GDP growth in 2025 have been revised downward in recent months, while inflation projections have edged higher (charts 1 and 2). This divergence—a hallmark of stagflation risk—signals a world in which economic constraints are no longer primarily demand-driven, but stem from structural disruptions to supply and trade flows. While not yet systemic, this shift poses mounting challenges for policymakers.

The volatility of US policy has become central to this dynamic. As discussed in recent posts (see, for example, Strategic Uncertainty) the US trade stance is best understood not merely through an economic lens, but via game theory. The imposition and subsequent walk-back of tariff threats reflects a strategy of coercive signalling—intended to shift the behaviour of trade partners without necessarily following through on the most extreme threats. In this light, tariffs operate as bargaining tools in a multipolar geopolitical game, not as fixed policy commitments.

However, this strategic ambiguity carries costs. The oscillation between threat and moderation injects volatility into global supply chains and unsettles business investment decisions. It also forces monetary authorities into increasingly reactive positions, as they attempt to disentangle policy rhetoric from likely economic outcomes. When the rules of engagement shift unpredictably, traditional models of inflation forecasting and global adjustment lose traction.

These dynamics are now playing out within a fragile global financial architecture. The US remains at the centre of global capital flows, sustained by deep financial markets but also by persistent current account and fiscal deficits. When tariffs are deployed—especially on key intermediate goods—the US effectively channels its inflation outward, while also disrupting the trade surpluses that help finance its imbalances. The result is a strain on the global adjustment mechanism: capital is more volatile, exchange rate alignments become more politicized, and surplus economies face renewed pressure to absorb the adjustment unilaterally.

Markets have begun to respond. Forward-looking surveys show a clear deterioration in business sentiment and a sharp adjustment higher in price expectations (chart 3). This reflects a world in which production costs are rising independently of demand conditions—a classic stagflationary pattern. Yet central banks are caught in a vice: to tighten policy in the face of higher inflation risks slowing already-fragile growth, while easing too soon could entrench price instability.

Still, it is important to note that not all forces are pushing in the same direction. The unpredictability of US policy itself may exert a moderating effect on inflation. Firms faced with unclear trading conditions and uncertain costs are likely to delay investment and hiring, which in turn may constrain price and wage pressures. In addition, declining global energy prices—driven in part by weaker aggregate demand and improved supply capacity—offer a disinflationary buffer.

Nevertheless, the broader concern is that volatility is becoming endogenous to the global system. The partial retreat from tariff escalation in recent days has not reassured markets or partners; it has revealed the extent to which US policy is now shaped by short-term domestic pressures rather than long-term strategic clarity. In such a world, policy uncertainty itself becomes a driver of macroeconomic outcomes, and not merely a risk factor to be managed.

For global investors and policymakers, the implications are profound. The erosion of predictable rules of engagement in trade and finance raises the spectre of a more fragmented, unstable economic order—one in which global imbalances are more difficult to correct, inflation is more difficult to forecast, and cooperation is harder to sustain. If the US continues to shift between confrontation and retreat, the burden of adjustment will increasingly fall on those economies least able to bear it.

The challenge now is not only to avoid stagflation, but to adapt to a world in which it may become a recurring possibility—not because of exogenous shocks, but because of the endogenous instability of strategic economic policymaking itself.