Insights 
VT 
JP Morgan forecasts that US tariffs could reduce GDP by 1% and increase inflation by 1–1.5%. Michael Feroli, chief US economist at JPMorgan, describes the current tariff increases as the largest since World War II. There is uncertainty about how much higher costs will be passed to consumers.
Impact on GDP and Inflation
The GDP impact is expected to stem primarily from weaker consumption, accounting for about two-thirds of US output. JP Morgan estimates a GDP drag of just under 1% in the year’s second half. This comes as pre-tariff inventories decrease and effective tariff rates rise to approximately 18% from 3% earlier in the year.
While inflation isn’t expected to rise uncontrollably, economists predict core price gains of 0.3%–0.5% monthly. This could elevate the Federal Reserve’s preferred measure to the low- to mid-3% range.
Concerns arise as the expiry of de minimis tariff exceptions for imports under $800 on August 29 approaches. This change might increase prices for retail goods. Companies display less willingness to absorb these heightened costs, contributing to broader market worries.
With the prospect of a 1% hit to GDP and a 1.5% rise in inflation, we should prepare for increased market turbulence. These tariff-driven pressures create a challenging environment of slowing growth combined with rising prices. This scenario suggests that assets may not move in their usual predictable patterns in the coming weeks.
Implications for Market Volatility
We are seeing a setup for higher market volatility. The CBOE Volatility Index (VIX) has remained relatively subdued, recently trading around 15, but this combination of headwinds could easily push it back above 20. We should consider buying VIX call options with September expiries as a direct hedge against rising market fear.
The drag on economic growth, which we already saw slow to 1.4% in the second quarter of 2025, points toward a defensive posture on equities. We should consider buying put options on broad market indices like the S&P 500. The impact on consumption is a direct threat to corporate earnings, which may not be fully priced into the market yet.
The threat of higher inflation complicates the outlook for interest rates, making Federal Reserve rate cuts less likely this year. After core inflation ticked up to 0.4% last month in July 2025, any further acceleration could pressure bond prices. We can use derivatives to position for this by considering put options on long-term Treasury bond ETFs.
A specific catalyst to watch is the August 29th expiry of the de minimis tariff exception. Considering over a billion packages entered the US under this rule in 2024, its removal will directly squeeze margins for many online retailers. Traders should look at put options on retail-focused ETFs expiring in September or October to capture any negative reaction.
