Donald Trump won office promising to bring down inflation. Economists and the Federal Reserve suspect his promises of tariffs, tax cuts and deportations will have the opposite effect.
Federal Reserve officials fear Trump’s forthcoming policies will “stoke inflation,” Axios said. That’s why (according to minutes from the Fed’s December meeting) they have plans in place to keep interest rates “higher for longer” instead of bringing them down, making everything from mortgages to credit card spending more affordable. The Fed did lower interest rates in December, but projected making just two rate cuts in 2025, “half as many as anticipated just three months earlier,” Axios said.
That could prove a political challenge for the new president. Reducing inflation will be “job one” in the Trump presidency, Justin Muzinich said at The Wall Street Journal. The problem is that inflation is slowing, but is “sticky.” And that creates a problem: If businesses expect inflation to persist, they will “raise prices in anticipation.” But the much-discussed inflationary effect of Trump’s proposed tariffs is probably overblown. Trump must make clear to the business sector “that controlling inflation is a priority.”
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A ‘hole in the labor force’
Trump may find it difficult to balance inflation control against priorities like mass deportation, said CNBC. His promises of large-scale expulsions of migrants “could leave a hole in the labor force,” particularly in sectors like construction and agriculture, which already face inflationary pressures. One study suggested that every half-million migrants deported would result in 44,000 job losses for American-born workers. The result would be that prices are “likely going to go up as a result of a mass deportation effort rather than down,” said Chloe East, a researcher at the National Bureau of Economic Research.
The good news about Trump’s economic plans is that “they might not happen,” economist Nouriel Roubini said at MarketWatch. While Trump will be “pro-business overall,” and his deregulatory agenda could “promote growth and encourage competition, reducing prices over the longer term.” Tariffs and deportations won’t. However, Trump keeps a close eye on the stock market, seeing it as one of the ultimate signals of his success. If traders send stocks plunging in response to market shocks, that signal “could pour cold water on his most febrile ideas.”
Economy could ‘remain on track’
It’s not just the American economy at stake. A second Trump presidency “looms large over the global economy,” said BBC News. Europe is still battling inflation, and officials are worried about the impact of new American priorities. Trade wars are “not conducive to growth,” said Christine Lagarde, president of the European Central Bank. In the short term, however, those forces are “probably net inflationary.”
There are some skeptics of inflation alarmism, Reuters said. The effect of Trump’s policies “probably will be modest in terms of their effect on the inflation rate,” said former Fed Chair Ben Bernanke. He said it’s difficult to know how tariffs will affect inflation because it’s unclear if Trump wants them “temporarily for bargaining purposes or whether he wants to keep them permanently,” he said. Karen Dynan, an economist who served in the Obama administration, agreed. Even with a change in policies “there’s a good chance the economy’s going to remain on track,” she said.
