Navigating Stagflation Risk: Impact of Tariffs for HR Leaders

This article was written before the Trump administration's April 9 announcement that most of their new tariffs will be delayed by 90 days.

New tariffs announced by the Trump administration last week present a pressing economic challenge for HR leaders. The tariffs could cause high inflation and stagnant economic growth, a combination known as stagflation. HR leaders may need to assess their workforce strategies, compensation planning, and organizational resilience in response.  

“Assuming that the tariffs announced April 2 are maintained in their current form, we expect price increases across a broad range of goods and services, including items purchased by U.S. consumers and inputs to production purchased by U.S. businesses,” SHRM Senior Labor Economist Justin Ladner said. “All else being equal, this could drive up inflation while depressing aggregate demand.”

Potential Tariff Impacts for HR Leaders

The macroeconomic impact of these tariffs will be broad and complex. The tariffs are expected to drive up the cost of imported goods and raw materials, increasing production expenses for businesses and potentially leading to higher consumer prices. When companies cannot fully pass on these costs, economic growth tends to stall even as inflation continues to climb, as it did in the U.S. in the late 1970s. The ripple effect extends beyond the finance department, placing HR leaders in a difficult position: balancing tight budgets with the need to maintain a competitive workforce.

The tariffs’ effects on individual businesses will vary, depending on their industry and their dependence on products, components, or raw materials sourced overseas. Whether other nations respond with higher tariffs of their own, as China has, is also a consideration.

There are several key areas HR leaders should assess carefully to understand their organization’s exposure.

Rising Operational Costs and Wage Pressures

• Challenge: If companies face higher production costs, there may be less room to increase wages.

• Implication: Employees could feel the pinch as living costs increase, potentially leading to dissatisfaction and higher turnover.

• Strategic Focus: Regularly review and adjust compensation policies to keep pace with inflation and maintain employee satisfaction.

Production and Supply Chain Disruptions

• Challenge: Industries that rely on imported raw materials may see significant cost increases unless they can find a domestic supplier. Labor issues may complicate efforts to shift production to the U.S.

• Implication: Companies may have to charge more for their products or accept thinner margins. For export-focused companies, potential retaliatory tariffs may further disrupt international market access.

• Strategic Focus: Collaborate with operations teams to align workforce planning with shifts in production needs and supply chain adjustments.

Economic Slowdown and Workforce Stability

• Challenge: Even organizations that aren’t directly impacted by tariffs will face a more challenging economic outlook. If inflation rises while economic growth slows, businesses may face tough financial decisions.  

• Implication: This could result in hiring freezes, limited wage increases, or even layoffs.

• Strategic Focus: Develop robust change management and communication strategies to reassure employees about job security and keep morale high during uncertain times.

Further Uncertainty in Trade Policy

• Challenge: The evolving nature of trade policies adds complexity to long-term business planning.

• Implication: Global events or sudden policy changes can disrupt investments and strategic plans, impacting staffing and operational decisions.

• Strategic Focus: Maintain transparent communication with employees and use scenario planning to prepare for various economic outcomes.

Sudden changes in tariff policies can force businesses to revise their strategies, but since these policies could be reversed at any time, committing resources to mitigate the tariffs’ impact will be a challenge for many businesses.

“In such an uncertain environment, many producers may be unwilling to commit to any substantial investment because any investment choice they make based on current economic policies may suddenly look terrible if those policies change suddenly,” Ladner said.

Key Takeaways for HR Leaders

To successfully guide organizations through these tariff-driven challenges, HR leaders should take the following actions.

• Assess Inflation’s Impact on Workforce Needs: Revisit compensation frameworks to ensure they remain competitive in an inflationary environment. Plan for potential cost-of-living adjustments and assess the broader impact of wage pressures on budgets.
• Prepare for Production-Related Workforce Shifts: Collaborate with operations to understand how tariffs are influencing supply chains and production costs. Align workforce planning efforts to account for layoffs, hiring delays, or adjusted staffing needs.
• Focus on Communication and Change Management: Equip managers with the tools needed to address employee concerns and maintain morale amid uncertainty. Transparent communication about organizational strategies and policies is essential during periods of volatility.
• Build Workforce Flexibility: Invest in upskilling and reskilling to ensure employees are prepared to take on evolving roles. Developing a more adaptable workforce makes it easier for organizations to pivot their response strategies as conditions evolve.
• Engage Your CEO and Board: HR leaders should go to their CEO and board and proactively discuss how tariffs will affect the organization’s workforce. HR must visibly lead the response to these concerns and offer proactive solutions.
• Monitor Policy Developments: Stay informed about domestic and global trade policy changes. The ability to respond swiftly to regulatory shifts will offer businesses and their workforce a competitive edge.

By taking these measures, HR leaders can provide value as proactive partners, helping their organizations mitigate risks while navigating the complexities introduced by new tariffs. With thoughtful planning, businesses can remain agile and resilient despite significant economic challenges.

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