JP Morgan predicts that US tariffs could cut GDP by 1% and raise inflation by 1% to 1.5%. Michael Feroli, chief US economist at JPMorgan, says these tariff hikes are the largest since World War II. There is uncertainty regarding how much of these increased costs will be passed on to consumers.

Impact on GDP and Inflation

The expected GDP impact primarily comes from lower consumer spending, which makes up about two-thirds of the US economy. JP Morgan forecasts a GDP decline of nearly 1% in the second half of the year. This is due to lower inventories before tariffs and an increase in effective tariff rates from 3% to about 18%. While inflation is not expected to spiral out of control, economists anticipate monthly core price increases of 0.3% to 0.5%. This could push the Federal Reserve’s preferred inflation measure to the lower to mid-3% range. Concerns are growing as the end of the de minimis tariff exceptions for imports under $800 approaches on August 29. This change may raise retail prices. Many companies are hesitant to absorb these higher costs, leading to broader market anxiety. With the potential for a 1% drop in GDP and a 1.5% increase in inflation, we should get ready for more market volatility. These tariff pressures create a tough environment of slow growth and rising prices, which may affect how assets typically perform in the coming weeks.

Implications for Market Volatility

We are heading toward higher market volatility. The CBOE Volatility Index (VIX) has been relatively low, recently around 15, but these challenges could drive it back above 20. We should consider buying VIX call options expiring in September as a hedge against rising market fear. The slowdown in economic growth, which dropped to 1.4% in the second quarter of 2025, suggests we should take a defensive approach to equities. Buying put options on broad market indices like the S&P 500 may be wise. The impact on spending directly threatens corporate earnings, which might not yet be fully reflected in market prices. The threat of rising inflation complicates the outlook for interest rates, making it less likely that the Federal Reserve will cut rates this year. After core inflation rose to 0.4% in July 2025, any further increase could put pressure on bond prices. We can prepare for this by considering put options on long-term Treasury bond ETFs. A key event to monitor is the August 29 end of the de minimis tariff exception. Because over a billion packages entered the US under this rule in 2024, its removal will significantly affect the profit margins of many online retailers. Traders should look at put options on retail-focused ETFs expiring in September or October to take advantage of any negative market reactions. Create your live VT Markets account and start trading now.

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