Citi is increasingly concerned about the possibility of stagflation due to President Trump's implementation of new tariffs. The bank believes that high tariffs are pushing the United States closer to stagflation, a condition combining economic stagnation with high inflation. Several major banks like Goldman Sachs and UBS have also warned their clients about the risks of stagflation in recent weeks. Citi's latest warning reflects a growing fear among Wall Street banks about the potential negative impact on the US economy.

In a recent client note, Citi highlighted the rising risk of stagflation, characterized by weak economic growth and stubbornly high inflation. Economists caution that such a scenario would be more challenging for policymakers to address than a typical recession because high inflation would limit the Federal Reserve's ability to lower interest rates to stimulate the economy.

The increased risk of stagflation is primarily attributed to Trump's latest tariff proposals, which are expected to take effect soon. These tariffs, including a 25% rate on imported cars and parts, may move the US closer to stagflationary conditions. Citi defines large tariffs as those exceeding 20%, encompassing Trump's recent tariff announcements targeting goods from Canada, Mexico, and China.

Initially downplaying the risk of stagflation, Citi has since revised its outlook, with projections indicating that a 10% average tariff rate could lead to stagflation within six months. If tariffs reach a 20% average rate, it could result in a significant growth shock, according to the bank's predictions.

The shift in Citi's stance on the US economy began in March when the bank downgraded its rating on the US stock market due to concerns over trade policy impacts. Similarly, other financial institutions such as Goldman Sachs, UBS, and Bank of America have also expressed worries about stagflation risks, largely fueled by uncertainties surrounding President Trump's trade policies.