Introduction to Tariffs and Their Impact
The year 2025 has seen the term "tariffs" become a household name, with Americans growing increasingly concerned about their effects on the economy. Despite the S&P 500 reaching record levels as of July 23, tariff fears still linger. On the same day, President Trump announced tariff rates ranging from 15% to 50%, as reported by Bloomberg. The risks posed by tariffs to the American economy have not disappeared, and it’s essential to understand these risks and explore options to hedge against them.
Inflation Uncertainty
In June, the first signs of tariff-induced inflation started to appear in the Labor Department’s CPI report. Annual inflation reversed its downward trend and jumped from 2.4% to 2.7%. Core inflation rose to 2.9%, and food prices increased by 3.0%. According to Rachel Gustafson, a certified financial planner (CFP) at Financial Investment Team, "Many businesses try to temporarily absorb higher costs before passing them to consumers, but over time this just isn’t fiscally possible." Gustafson advises clients to prepare for costs going up.
Protecting Yourself from Inflation
As a consumer, the first step is to track your spending with more precision. Gustafson notes that most families don’t know how much they are spending and in what categories. Beyond better tracking and budgeting, aim to invest in inflation-resilient assets like real estate, commodities, precious metals, and stocks. Real assets and cash-flowing businesses can adjust in price accordingly, even if the dollar plummets in value.
Heightened Recession Risk
A survey by LifeStance Health found that 83% of Americans report feeling financial stress driven by recession concerns, layoffs, inflation, and rising living costs. Investment giant J.P. Morgan forecasts a 40% chance of recession in 2025. To prepare, start by tightening your spending and deepening your emergency fund. Einat Steklov, CEO of Kashable, urges workers to level up their personal finance game by utilizing budgeting resources, emergency savings programs, and financial education.
Preparing for a Recession
In addition to saving more money, look for ways to earn more and protect your income better. This could include adding side hustles to diversify your income streams or making yourself irreplaceable to an employer. Ask yourself if there are opportunities to move into a higher-paid position or if you can pursue another industry. Gustafson adds, "Have you received a pay increase recently, and if not, are you able to ask for one?"
Heightened Market Volatility and Geopolitical Risk
Geopolitical risk has sent financial markets seesawing with volatility due to trade wars, hot wars in the Middle East and Europe, and ongoing tariff uncertainty. The VIX volatility index in 2025 is showing higher readings than six out of the last eight years. This volatility is also reflected in record-high gold prices, long considered a safe haven from geopolitical risk and volatility. Year to date, gold is up 29.2% per Yahoo Finance.
Protecting Yourself from Market Volatility
To protect yourself, don’t panic sell. Dr. Alex Michalka, head of investments at Wealthfront, explains, "Reacting emotionally to short-term market movements or trying to time the market usually leads to poor outcomes." Michalka recommends diversifying your portfolio by adding other types of assets to reduce risk and bring your overall strategy into better balance. Real assets like precious metals, commodities, and real estate can help you diversify and hedge against inflation.
Conclusion
In conclusion, the risks posed by tariffs to the American economy are real and ongoing. It’s essential to understand these risks and take steps to protect yourself. By tracking your spending, investing in inflation-resilient assets, preparing for a recession, and diversifying your portfolio, you can hedge against the uncertainties of the market. Remember, it’s crucial to stay informed and adapt to the changing economic landscape to ensure your financial stability and security.
