A significant stagnation in job growth since May coincides with both new tariff implementations (reducing labor demand) and stricter immigration policies (constraining labor supply). This combination has created a powerful dual shock that has effectively halted job creation in the US economy.

Former Fed Vice Chair Alan Blinder suggests businesses were hesitant to pass tariff-related costs to consumers because of constant policy changes. This uncertainty over the final tariff rate, while bad for investment, paradoxically suppressed the immediate inflationary impact many economists expected.

Instead of immediately passing tariff costs to consumers, US corporations are initially absorbing the shock. They are mitigating the impact by reducing labor costs and accepting lower profitability, which explains the lag between tariff implementation and broad consumer inflation.

While tariffs affect goods prices, immigration controls are reducing the labor supply, particularly in the service sector. This creates upward wage and price pressure on services, a subtle but significant contributor to overall inflation that is difficult to isolate in real-time data.

While election-year fiscal stimulus may boost 2026 growth, it sets the stage for a potential inflation problem in 2027. The combination of lagged effects from the stimulus, tariffs, and restrictive immigration could cause overheating. Due to policy lags, the consequences won't be fully felt until after the election year.

The inflationary impact of tariffs is appearing slower than economists expected. Companies are hesitating to be the first to raise prices, fearing being publicly called out by politicians and losing customers to competitors who are waiting out the trade policy uncertainty.

Robert Kaplan cautions against dismissing inflation risks. Many businesses are still absorbing tariff costs or working through pre-tariff inventory. He believes the full price impact will be passed on to consumers in 2026, potentially keeping inflation stickier than markets currently expect.

The economic impact of tariffs is not an immediate, one-time price adjustment. Instead, Boston Fed President Collins characterizes it as a "long one-off" process where the full effect can take months or even a year to filter through the economy. This prolonged adjustment period extends uncertainty and complicates inflation forecasting.

While the direct impact of tariffs may be temporary, the elongated process risks making consumers and businesses comfortable with higher inflation. Combined with questions about the Federal Reserve's political independence, this could unmoor expectations and make inflation persistent.