If you’re still betting on a stagflation storm, you might want to take a closer look at what’s quietly unfolding in the background. While markets obsess over CPI prints and Fed speeches, two forces are creeping in that could flip the script completely. The debt ceiling standoff and a renewed trade war. And neither points to higher inflation.
In fact, both are deflationary.
Let’s start with the debt ceiling mess. We’ve seen this movie before. Political gridlock. Public threats. Congressional chaos. But beneath the headlines is a very real economic drag. When Congress locks up, the government slows down. That means delayed spending, frozen projects, and growing uncertainty for consumers and businesses. Confidence gets hit. Budgets get cautious. Hiring plans stall. The result is slower demand, not higher prices.
And when the Treasury gets squeezed, it often pulls back on issuing new debt. That means less liquidity in the system. Less fuel for growth. Tighter financial conditions. You do not get a red-hot economy from a government at war with itself. You get contraction pressure. That is deflationary.
Now let’s talk about the trade war. Tariffs are back in the conversation, and the stakes are rising. On the surface, tariffs may sound inflationary. They raise the cost of imported goods. But over time, they tend to hit demand harder than they raise prices.
When input costs go up, most businesses do not pass it all on. They absorb it. They cut margins to stay competitive. And when that happens across sectors, companies start cutting elsewhere. Investments shrink. Hiring slows. Eventually, pricing pressure turns to profit pressure.
Then come the retaliation effects. Countries hit back. Exports drop. Manufacturing activity falls. Raw materials pile up. The global economy shifts from expansion to hesitation. It is not just about trade flows. It is about a wave of uncertainty that spreads into boardrooms. Companies freeze capital spending. Infrastructure plans get shelved. New hiring stalls.
This uncertainty is the real deflationary engine. When companies stop planning for growth, inflation expectations follow them down. Investors pull back. Consumers hunker down. What starts as a tariff headline turns into a drag on the entire global cycle.
Recent inflation numbers have come in cooler than expected:
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April CPI showed core inflation at 3.6 percent, slightly below the 3.7 percent forecast
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Core PCE rose just 0.2 percent in April, softer than the expected 0.3 percent
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Average hourly earnings in May cooled, showing weaker wage pressure
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Job openings declined, pointing to a loosening labor market
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Used car prices dropped sharply, reversing earlier gains
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Retailers are offering heavier discounts, reflecting fragile consumer demand
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Gasoline prices softened through May, easing headline inflation
These are not signs of overheating. They are signs of an economy that is leaning back, not sprinting ahead. And if the next CPI report confirms this cooling trend, it could be the spark for a massive unwind in bond shorts.
So if you are watching inflation prints, do not forget the bigger picture. The real threats to inflation are not energy spikes or runaway wages. They are dysfunction in Washington and rising global trade walls. Both slow growth. Both kill demand. Both send a message the bond market is already starting to hear.
A shift is coming. The signs are everywhere. And the trades built for inflation may not survive it.