The whole world was beaten in the face! Under the tariff, why didn't stagflation come and the dollar fell?

Release Time：2025-07-28

The actual economic impact of Trump's tariff policy is completely different from what was predicted at the beginning of the year, and Wall Street has been slapped in the face.

Ruchir Sharma, the chairman of Rockefeller International and a renowned investor, recently wrote an article pointing out that despite the Trump administration's significant increase in tariffs, the US dollar not only failed to appreciate as expected, but also suffered its most severe decline in half a year since the early 1970s.

Meanwhile, the expected "stagflation" effect - a slowdown in economic growth accompanied by rising inflation - has not been clearly reflected in the macro data. Tariff revenue grew at an annual rate of 300 billion US dollars, about four times that of the same period last year, but the US economy remains resilient.

The article states that the investment boom in artificial intelligence, government fiscal stimulus, and other macro factors have jointly offset the negative impact of the tariff policy. This phenomenon challenges traditional economic theories, indicating that complex economic systems are rarely dominated by a single factor, even a major shock like Trump's tariffs.

Expectations fell through: The US dollar weakened rather than strengthened

At the beginning of the year, almost all economists, investors and business executives reached a consensus that Trump's tariff policy would strengthen the US dollar and trigger stagflation. Economists estimate that for every one percentage point increase in tariff rates, the US economic growth will decline by 0.1%, while the inflation rate will rise by 0.1%. However, the actual situation is quite different.

The article points out that the effective tariff rate in the United States has risen from 2.5% to 15%, but the US dollar has not risen but fallen instead, experiencing the most severe decline in half a year since the early 1970s. This unexpected trend is now attributed to the historic overvaluation of the US dollar at the beginning of the year. Many foreign investors once held large amounts of US dollar assets, but recently they have begun to hedge against these risks and invest more outside the United States.

Several countries are becoming increasingly attractive havens for capital, partly because tariff threats have prompted these countries to push for economic reforms and reach trade agreements with non-US partners, further diversifying global capital flows.

The artificial intelligence craze offsets the negative effects of tariffs

Sharma believes that the main reason why the tariff policy failed to produce the expected stagflation effect lies in the counterbalance of multiple positive factors, especially the artificial intelligence boom and the government's continuous fiscal stimulus.

Since January this year, the projected annual spending of tech giants on artificial intelligence infrastructure has increased by 60 billion US dollars to 350 billion US dollars. A large number of small and medium-sized enterprises are also competing to ride this wave, further promoting economic growth. This widespread optimism has effectively neutralized the possible decline in investment confidence caused by the uncertainty of trade policies.

Sharma wrote: "AI-driven optimism boosts growth by maintaining a loose financial environment, even when interest rates are high." According to a new index from the Federal Reserve, if it weren't for the continued rise in the stock market (mainly driven by artificial intelligence stocks), the current financial environment would be neutral rather than loose.

Corporate tax reduction and exemption buffers the cost of tariffs

The Trump administration's tax cut policy made it easier for American businesses to absorb most of the tariff costs rather than pass them all on to consumers. According to Sharma's analysis, Trump's "Big Nice Act" is expected to save American businesses approximately 100 billion US dollars this year and exceed this figure in 2026, mainly in the form of tax breaks.

Despite this, the negative economic impact of tariffs has indeed begun to emerge, mainly reflected in the price hikes of household appliances, sports goods and toys. According to economists' estimates, foreign exporters actually bear 20% of the tariff costs - much higher than the proportion during Trump's first term, while the remaining 80% is roughly evenly distributed among American businesses and consumers.

Economic complexity surpasses single-factor analysis

The overall inflation rate remains suppressed by the decline in rents and the fall in prices of other goods such as used cars and energy. These price drops have nothing to do with tariffs. Used car prices are still falling from the highs caused by supply disruptions during the pandemic. Sharma wrote:

Economists' predictions about tariffs are not entirely wrong. Stagflation may eventually occur, especially if the average effective tax rate continues to rise. But so far, even a significantly raised tariff rate has not been enough to overwhelm the greater forces that support growth and control inflation.

Sharma believes that the current situation to some extent repeats the scenario of 2023. At that time, many people expected that the Fed's interest rate hikes would significantly slow down the growth of the US economy, only to find that its impact was offset by the artificial intelligence spending boom and the continuous fiscal support from the US government.

The core view of this renowned investor is that the excessive global attention to Trump has magnified the limitations of the simple economic model - that is, the belief that A certain eye-catching factor A will inevitably lead to result B. However, complex economic systems are rarely shaped by a single factor, and even major shocks like Trump's tariffs are no exception.

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