Whoever wins Novembers election, inflation will present them with an immediate challenge. More than two years after the Federal Reserve started raising interest rates to alleviate a pandemic-era price spike, the so-called core consumer price index remains well above the central banks target. Its a bit puzzling, then, that former President Donald Trumps economic agenda seems to be dedicated to raising prices.
What policies would a second Trump administration pursue? The former president hasnt been a model of clarity on the campaign trail, but some general themes have emerged.
Tariffs, one of Trumps only consistent enthusiasms, are a sure thing. Starting in 2018, his administration imposed several rounds of duties, prompting predictable retaliation. Combined, these measures eliminated jobs, slashed incomes and cost consumers about $51 billion annually. Now Trump wants to impose tariffs of 60% on Chinese-made products and 10% on other imports. Bloomberg Economics estimates that this would raise consumer prices by 2.5% over two years and reduce growth by 0.5%. Trump has also promised a 100% duty on imported cars. Details TBD one analyst describes the likely effect as catastrophic but the point is that trade wars of this kind are always prone to raising prices.
Trumps plans for monetary policy pose a similar risk. According to media reports, his advisers are laying the groundwork for the president to weigh in directly on interest-rate decisions. (His campaign has vaguely disputed these reports.) The rationale for central-bank independence among the most successful policy innovations of the post-war era is that politicized monetary policy will tend to have a pro-inflationary bias. In this case, a self-fulfilling prophecy is likely: Consumers and businesses, expecting the Fed to tolerate higher inflation under Trump, will behave in ways that (once again) boost prices.
More directly, the former president is toying with devaluing the dollar. Although the hope is to revive domestic manufacturing, exactly how hed carry out this plan isnt clear. (Like many products of Trump World, it seems to be premised on a lot of needless belligerence.) On balance, such manipulation is likely to invite retaliation, erode faith in the dollar and do little to actually boost exports. By raising the cost of imported goods and inputs for domestic producers, it would also (perhaps youve sensed a pattern) increase prices.
Trumps tax plans, finally, would tend in the same direction. He says hell extend the expiring provisions of the Tax Cuts and Jobs Act of 2017 and has at times mused about a further reduction in the corporate rate, to 15% from 21%. Recall that the drafters of the law tied themselves in knots to avoid acknowledging its true costs (hence the expirations). Extending it in full would cost about $3.8 trillion by 2033. A 15% corporate rate would cost perhaps a half-trillion more. Trumps plans for further tax cuts Ill give you a Trump middle class, upper class, lower class, business class big tax cut, he said at a rally on Saturday remain rather nebulous, but fiscal discipline does not sound like the governing priority. Its safe to say (at risk of repetition) that these policies, too, will contribute to higher prices.
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