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Germany, Europe’s largest economy, is grappling with fresh signs of strain as rising unemployment and a surprise uptick in inflation darken its outlook—just as new U.S. tariffs begin to take hold across the European Union.

Preliminary data released Friday showed German inflation climbing 2.1% in August, above economists’ forecasts of 2%. That marked an acceleration from July’s softer 1.8% pace. Core inflation, which strips out food and energy, held steady at 2.7%, according to the federal statistics office, Destatis.

Labor market figures told an equally concerning story. The number of unemployed rose sharply to 3.025 million, pushing the jobless rate to 6.4%. Economists warn the uptick underscores a cooling labor market at a time when businesses already face mounting headwinds.

The twin challenges of inflation and unemployment arrive as Germany braces for the ripple effects of U.S. President Donald Trump’s tariff regime. The EU and U.S. reached a trade agreement in July, including a blanket 15% tariff on many European goods exported to America. The levy is expected to weigh heavily on sensitive sectors such as pharmaceuticals, though key details remain unresolved, leaving companies unsettled.

While the tariffs are widely projected to drive consumer prices higher in the U.S., economists note the impact on Europe could cut in multiple directions. “One scenario could see prices falling in the eurozone due to overcapacity and weaker U.S. demand,” said Carsten Brzeski, ING’s global head of macro. “But companies may also raise European prices to offset shrinking margins in the U.S.”

Germany’s export-heavy economy was already teetering on the brink. GDP grew just 0.3% in the first quarter before contracting by the same margin in the second, official figures show. The slowdown adds further complexity to the European Central Bank’s decision-making, with policymakers weighing whether to ease rates at their September meeting.

For now, the ECB is holding steady, having left its benchmark rate unchanged at 2% in July. But with inflation surprising to the upside and unemployment trending higher, the balance of risks is shifting—and so too is the debate over how Europe’s economic powerhouse can weather the turbulence ahead.

High-level negotiations between the United States and China wrapped up in Madrid on Monday, with trade issues taking a back seat to a surprise announcement on TikTok’s future.

Treasury Secretary Scott Bessent revealed that a tentative framework has been reached between two private parties over the divestment of TikTok’s U.S. operations, calling the agreement’s commercial terms “settled.” Both President Donald Trump and President Xi Jinping are scheduled to review the deal during a call on Friday, just two days before Washington’s deadline requiring TikTok to be sold or banned in the U.S.

While trade officials had arrived in Spain prepared to tackle tariffs, export restrictions, and broader market disputes, those discussions were largely deferred. U.S. Trade Representative Jamieson Greer admitted the talks were “very focused on TikTok,” leaving major trade disagreements unresolved.

Rising Frictions Beyond TikTok

The talks come amid a rapid escalation of economic hostilities. Over the weekend, Beijing launched twin investigations into the U.S. semiconductor industry—one probing alleged dumping of American-made analog chips, the other targeting Washington’s restrictions on Chinese tech firms.

Just days earlier, the U.S. expanded its entity list to include 23 Chinese companies. In response, China’s market regulator announced that Nvidia had violated antitrust rules, signaling an extended probe into the U.S. chipmaker. Bessent called the timing of the move “unfortunate,” while analysts suggested Beijing was using Nvidia as leverage at the negotiating table.

“This is Beijing showing its tougher side,” said George Chen of The Asia Group. “Nvidia has effectively become a bargaining chip.”

Hard Bargaining Ahead

Experts warn that despite the Madrid meetings—marking the fourth round of bilateral talks in four months—progress remains limited. Former U.S. trade negotiator Wendy Cutler noted that Beijing had already succeeded in securing concessions on tech equipment exports, even as it tightened restrictions on U.S. access to critical minerals.

“With this tit-for-tat dynamic, it’s hard to imagine the relationship improving,” Cutler said. “At best, it feels like running to stand still.”

Meanwhile, China’s Ministry of Commerce lashed out at Trump’s call for the European Union to impose tariffs of up to 100% on Chinese goods linked to Russian oil purchases, denouncing it as “economic coercion” and a breach of earlier consensus.

The Road Ahead

Despite the heated exchanges, both sides are reportedly exploring a potential meeting between Trump and Xi later this year. According to The Wall Street Journal, Beijing has been pushing for months to host Trump on a state visit—the first since his trip to China in 2017.

Whether the TikTok deal will serve as a diplomatic icebreaker or simply another flashpoint in an increasingly fraught relationship remains to be seen.

The U.K. economy hit a wall in July, with growth flatlining after a stronger-than-expected run earlier this year—casting fresh uncertainty over Chancellor Rachel Reeves’ high-stakes Autumn Budget.

Data from the Office for National Statistics, released Friday, showed zero growth in July, broadly in line with economists’ forecasts and following a 0.4% rise in June. The slump was driven largely by a 0.9% fall in industrial output, while services and construction eked out modest gains.

The latest figures follow a mixed picture in the first half of 2025: GDP expanded by 0.7% in the first quarter, but slowed to 0.3% in Q2, despite briefly claiming the fastest growth rate among the G7. Economists now expect that momentum to fade further.

“After a surprisingly robust second quarter, all signs point to a slowdown in the back half of the year,” said Sanjay Raja, Deutsche Bank’s chief U.K. economist. “Trade-fronting, stockpiling, and a pullback in public sector spending will weigh on GDP through the autumn.”

Reeves’ Balancing Act

For Reeves, the timing could hardly be worse. With the Autumn Budget set for Nov. 26, the finance minister faces the twin challenge of delivering on her promise to revive growth while keeping public debt in check. She has pledged that spending will be funded by tax revenues rather than borrowing—a stance that raises the prospect of politically fraught tax hikes.

“The stagnation in real GDP in July shows just how difficult it is for the economy to gain momentum,” said Paul Dales, chief U.K. economist at Capital Economics. “And that’s before potential further tax increases come into play.”

Adding to the challenge is stubborn inflation. Consumer prices rose 3.8% in July, higher than expected and enough to keep pressure on the Bank of England. The central bank, which trimmed rates in August for the first time in four years, is widely expected to hold steady at its Sept. 18 meeting. Attention is already shifting to its Nov. 6 decision—just weeks before Reeves unveils her budget.

“The Bank is in a difficult spot,” said Fabio Balboni, senior European economist at HSBC. “Inflation resilience makes it harder to cut rates further, while fiscal pressures leave little room for maneuver.”

Carsten Brzeski, global head of Macro at ING, noted that while his team still sees scope for a November rate cut, the narrow 5–4 vote to ease policy last month shows how divided the Monetary Policy Committee has become.

With growth stalling, inflation proving sticky, and the Autumn Budget looming, Reeves now faces perhaps the toughest test of her tenure: convincing both markets and voters that she can deliver stability without stifling an already fragile economy.

The race to succeed Jerome Powell as Federal Reserve chair is gathering pace, with Treasury Secretary Scott Bessent now spearheading the search and quietly reshaping the conversation around the central bank’s future.

According to sources familiar with the process, Bessent has recently held private meetings with several names on President Donald Trump’s shortlist, including former Fed officials Lawrence Lindsey and Kevin Warsh—both of whom previously served as governors—as well as James Bullard, the former president of the St. Louis Fed.

Bessent is expected to expand the field further once the Federal Open Market Committee’s blackout period ends next week, allowing him to speak with sitting Fed officials. For now, the working list includes not only the candidates Trump has already floated, such as National Economic Council Director Kevin Hassett and Fed Governor Christopher Waller, but also a broader pool of about a dozen economists and market strategists.

At the same time, Bessent is advancing a reform vision that could redefine the central bank’s role. Sources say he is pushing for a gradual and market-friendly reduction of the Fed’s $6 trillion balance sheet—its vast holdings of Treasurys and mortgage-backed securities—while also urging a slimmer economic footprint for the institution.

His ideas echo an opinion piece he published in The Wall Street Journal last week, in which he criticized what he called the Fed’s “gain of function” overreach. “The Fed must change course,” he wrote, arguing that the central bank’s expanding toolkit has become “too complex to manage, with uncertain theoretical underpinnings.”

The timing is critical. Powell’s term as chair ends in May 2026, though he could continue as a governor. Meanwhile, the Senate will soon vote on Trump nominee Stephen Miran for a vacant Board of Governors seat, while controversy lingers over the president’s unsuccessful attempt to oust Governor Lisa Cook.

Against this backdrop, markets widely expect the Fed to deliver its first rate cut since late 2024 when the FOMC meets next week—a move that underscores how closely the White House is watching the central bank.

Bessent’s influence in both shaping the shortlist and steering the debate over the Fed’s mission ensures that this search is not just about who leads the institution next, but also about what kind of Federal Reserve America will have in the coming decade.

From grocery store shelves to auto shops and electronics aisles, tariffs are quietly but steadily pushing up the cost of everyday essentials — just as the U.S. labor market shows fresh signs of fragility.

A new Bureau of Labor Statistics report released Thursday highlights how tariff-sensitive items are weighing on household budgets. Apparel prices climbed 0.5%, video and audio products rose the same amount, and motor vehicle parts jumped 0.6%. New car prices edged up 0.3%, while energy costs increased 0.7%.

The grocery aisle delivered the biggest jolt: food prices surged 0.6% in August, the steepest monthly rise since summer 2022. Furniture and bedding also became 0.3% more expensive — up 4.7% year over year — while tools and hardware spiked 0.8%, reflecting how manufacturing-related goods are especially exposed. Coffee lovers felt the sharpest sting: a 3.6% monthly increase, translating to a 20.9% leap compared with a year ago.

Taken individually, these increases may not sound seismic. But together they add up to a worrying trend, one that is beginning to unsettle both consumers and policymakers at the Federal Reserve.

“We’ve already been seeing tariffs in the data for months,” said Luke Tilley, chief economist at Wilmington Trust. “The problem is, consumers weren’t in a good position to absorb these higher costs.”

The middle-class squeeze

For now, wary consumers are cushioning the blow by cutting back on discretionary spending, particularly on services, leaving companies with less pricing power. Even so, inflation near 3% on both headline and core measures remains well above the Fed’s 2% target.

“The middle-class squeeze from tariffs is here,” said Heather Long, chief economist at Navy Federal Credit Union. “Food, gas, clothing, and shelter all saw big jumps in August. And this is just the beginning — the pain will deepen as more costs are passed on.”

A stagflation dilemma

The persistence of these price hikes, coupled with a slowing labor market, is raising stagflation concerns at the Fed. Initial unemployment claims recently hit their highest level since 2021, while broader data suggest virtually no net job creation this year.

Policymakers now face a delicate balance: inflationary pressures from tariffs versus weakening employment that argues for looser policy. Markets are betting heavily that the Fed will side with growth. Futures tied to the federal funds rate are pricing in six quarter-point cuts through 2026 — more than the Fed’s own forecast of four.

“The mild inflationary push from tariffs is being outweighed by a slowdown in jobs, in the economy, and in consumer spending,” Tilley said. “It’s only a matter of time before the Fed cuts rates.”

What comes next

The Fed’s next policy meeting is just days away. While officials debate whether tariffs represent temporary noise or a more persistent inflationary threat, households are left grappling with a harsher reality: daily necessities are costing more, paychecks are stretching less, and the promise of relief may hinge on how quickly the Fed acts.