Krugman Warns US Economy Faces "Classic Stagflationary Shock" Amidst Policy Shifts

Paul Krugman, the Nobel laureate economist, has issued a stark warning regarding the increasing likelihood of stagflation in the United States, attributing the risk primarily to the current administration's economic policies. In a series of recent analyses published on his Substack in August 2025, Krugman articulated how aggressive tariffs and mass deportations are creating a dual economic challenge of rising inflation and slowing growth.

Krugman, a distinguished professor at the City University of New York and former New York Times columnist, highlights that these policies are "creating a significant inflationary shock" while simultaneously "imposing a significant drag on economic growth." He describes the current economic climate as "classic stagflationary shock territory," a term that evokes the challenging economic conditions of the 1970s.

According to Krugman, the US economy is currently being propped up by a substantial boom in artificial intelligence-related investments. However, he cautions that if this AI boom were to falter, "the odds are high that the US economy will be plunged into a recession." This reliance on a single sector's growth underscores the fragility of the current economic trajectory.

The economist also outlined the difficult dilemma facing the Federal Reserve in such a scenario. With both inflation and unemployment potentially high, the central bank would face a "tradeoff of risks," where standard tools to combat one issue could exacerbate the other. This complicates monetary policy responses significantly.

Krugman’s recent commentary has gained traction as economic indicators begin to align with his warnings. His analysis suggests that the long-term impacts of protectionist trade measures and restrictive immigration policies are now manifesting, pushing the economy towards a challenging combination of stagnant output and persistent price increases.