The 2020 vs. 2025 comparison

Why it's bad news for inflation and the economy six months from now and why the Fed Chair is worried

Photo by NordWood Themes on Unsplash

Recall back to any early economic courses you may have taken in school, and picture the most basic of Economics 101 charts: the graph of supply and demand curves. Consumer demand for products and their ability to pay for them are dynamic variables, as are the supply moves made by producers when responding to that demand. The dance between supply and demand is how prices are determined in an efficient market, with the optimal price point being the equilibrium between the exact right amount of supply to meet the corresponding level of demand.

At the risk of losing readers after two paragraphs of talk from the economic textbook, recall, as well, the economic lessons taught in Week 2 of that entry-level economics course: the concept of supply and demand curve shocks, which are unexpected events that significantly impact the amount of something that is available to purchase or the ability or interest among people to pay for it. An example of a supply shock could be a drought, for example, that kills off all the crops, thus leading to higher prices. An example of a demand shock could be a sudden sale on a particular product, or a government incentive or rebate to acquire it, which juices consumer interest.

What’s all of that got to do with today? Almost exactly five years ago, the global economy saw the most significant shocks to both the supply and demand sides of the equation that most of us will (hopefully) ever experience in our lifetimes, and those were, of course, all tied to the global pandemic. Supply chains experienced massive disruption as factories closed down and with workers being sent home. Global shipping became massively convoluted due to rapidly fluctuating demand from consumers for goods in combination with unprecedented back-ups at ports and other trade hubs. Tourism and other forms of travel around the world stopped overnight along with various other industry freezes like those of restaurants, hospitality, and entertainment, with ripple effects that were far-reaching.

There were demand shocks, too, including government stimulus programs and the widespread behavioral changes that came when people were stuck at home, altering consumer activities and bolstering home repairs and other inward-looking spending behaviors.

The result of all of those supply and demand shocks was a global economy running in highly inefficient ways, which led to rising prices, global inflation including right here in the United States, and a general sense of political and economic unrest. I don’t think it’s a far stretch to say Donald Trump rode this unease right back into the White House. Indeed, right-wing populist candidates have been defeating more traditional incumbent candidates in elections all over the world since 2020, not just here in the United States.

Today’s Shocks

Fortunately in 2025 we are not in the midst of a global pandemic, but there are similar shocks at play as those we saw five years ago. These are likely to have far-reaching impacts on those supply and demand curves, which, in turn, could mean bad news through the rippling effects on inflation and the economy as a whole in the months (and perhaps year?) to come.

An ongoing theme in conversations I am having with a lot of business owners, investors, and just in everyday talks with people these days is that the world is frozen. Things are on pause. Business owners are not investing in themselves through expansions and new hires because of fears about tariff uncertainty. Real estate investors are having trouble making the math work on acquisitions due to high prices and elevated interest rates, so not as many deals are taking place. People at one end of the spectrum are feeling cash-strapped due to the lingering effects of inflation particularly at the grocery store, while others are feeling anxious after being pounded by stock market losses over the past three months.

What it all means is this: the world is at a standstill. Everyone is waiting to see what happens. This includes banks and others in the financial world, who are suddenly cautious about which deals to finance and which to avoid.

All of this represents a massive shock to both supply and demand. On the supply side, consumers are tight, as evidenced in the most recent University of Michigan monthly report on consumer sentiment, which saw the fourth straight month of deteriorating figures. Per the report:

Consumer sentiment fell for the fourth straight month, plunging 11% from March. This decline was, like the last month’s, pervasive and unanimous across age, income, education, geographic region, and political affiliation. Sentiment has now lost more than 30% since December 2024 amid growing worries about trade war developments that have oscillated over the course of the year.

For better or worse, we live in a consumer-driven economy, so when people are feeling this pessimistic, it is bound to have a detrimental impact to spending, which, in turn, has a contracting effect on the economy.

On the demand side of the equation, the data is similarly poor. The National Federation of Independent Businesses just registered the worst reading in its monthly survey since June 2022, with business owners feeling notably pessimistic after a jump in sentiment in November following Trump’s election.

I wrote about the challenges of tariff implementation a few weeks ago, so I won’t dwell on it here, other than to say you can’t just wave a magic wand and move the levers of international manufacturing back to the United States overnight. A factory may cost tens of millions of dollars to set up, with a construction time of a year or more (and likely a lot longer due to local permitting processes, engineering, etc.). Business owners aren’t going to make that level of investment with such a fickle and capricious person in charge of the tariff process when the whole thing could be undone just a few months from now.

So What Does it All Mean

In the spring of 2020, few people suspected that the massive supply chain shocks combined with the shock of such significant changes to consumer behavior were going to lead to robust inflation amid a changing economic landscape 6-12 months later (and beyond). But that’s what happened. I fully expect that absent some serious reconsideration of the proposed tariff regime, we will see similar impacts come this fall and into 2026.

That is the reason why Federal Reserve Chair Jerome Powell is so worried. Earlier this week, he said there was a “strong likelihood” that prices would rise due to tariffs. He noted the particularly unique reality of the catalyst for the expected rise in prices, saying, “Our obligation is to keep longer-term inflation expectations well anchored to make certain that a one-time increase in the price level does not become an ongoing inflation problem.” In other words, the Fed will need to react to the Trump tariffs by, most likely, keeping interest rates high in order to cool things off and counteract that expected rise in prices due to this “one-time increase” (i.e. the tariffs).

The problem with that strategy, of course, is that higher rates do, in fact, impact the economy in detrimental ways by making the cost of borrowing (and, therefore, the cost of business investment and growth not to mention consumer borrowing for homes, cars, and credit cards) higher. There is likely to be a continued cooling effect from the high rates, which will run smack into the rising prices from the tariffs. This is inflation without growth, which to pull from perhaps the Week 3 economics textbook, is the definition of stagflation.

As I said a few weeks ago in the tariff article and then again last week in an article about how visits to the United States from tourists are dropping off, hopefully cooler heads can prevail. But time will tell on that, and, at the moment, I am not feeling particularly optimistic.

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Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com.

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Happy Easter and best wishes for a peaceful Passover to our Jewish friends. Have a great week, everybody.