Update 824 – Inflation Under Trump:
What Americans Should Look Out For?
Yesterday’s CPI report showed inflation rising slightly to 2.6 percent year-on-year, up from 2.4 percent in September. The new data shows that inflation remains above the Federal Reserve’s two percent target, but has fallen significantly from its peak of 9.1 percent in mid-2022. High prices, particularly of necessities like food and gas, were top-of-mind for voters in the last election.
Many supported Trump and Republicans in hopes that they would address the high cost of living, but, in fact, Trump’s proposed economic policy priorities suggest that those hopes could well be misplaced. With a Republican trifecta confirmed this week, Trump will have significant opportunities to implement his tariff and immigration policies. These, along with his proposed tax adjustments and potential undermining of Fed independence, run the risk of re-igniting inflation up just as it nears the target level. More on this below.
Best,
Dana
Inflation as Measured by CPI Ticks Up to 2.6% in October
Inflation, as measured by the Consumer Price Index (CPI), rose to 2.6 percent on an annualized basis last month, up from 2.4 percent in September, marking the first year-on-year increase in CPI-measured inflation since March, according to the October CPI report released by the Bureau of Labor Statistics yesterday morning. The expected reading shows that while headline inflation has fallen from its peak of 9.1 percent in mid-2022, headline inflation remains above the Federal Reserve’s two percent goal, with housing prices largely holding back progress.
Consumer prices rose by 0.2 percent on a monthly basis, on par with the three months prior. Core CPI inflation – which excludes food and energy prices – rose by 3.3 percent on a year-on-year basis and by 0.3 percent on a month-on-month basis in October, just as it had in September. Shelter costs – a measure of the cost of housing – accounted for over 65 percent of the annualized increase in core CPI and continues to be the primary contributor to overall inflation.
Source: Council of Economic Advisers
Prices within several sectors changed last month, including:
- Housing – Shelter costs rose by 0.4 percent on a monthly basis in October, up from a 0.2 percent month-on-month increase in September. The shelter index is weighted at about a third of the overall Consumer Price Index and last month, shelter costs accounted for over half of the month-on-month increase in prices. Shelter costs have been stubborn to come down even as overall inflation has fallen over the past two years.
- Food – Food prices rose by 0.2 percent on a monthly basis in October, down from a 0.4 percent month-on-month increase in food prices in September.
- Energy – Energy prices, which had fallen by 1.9 percent on a monthly basis in September and had been falling over the prior few months, remained steady last month. Contributing to this was a 0.9 percent decrease in gasoline prices, a 1.2 percent increase in electricity prices, and a 0.3 percent increase in natural gas prices on a monthly basis in October. Energy prices fell by 4.9 percent on an annualized basis last month.
Inflation Risks Under the Trump Presidency
Inflation was a key issue throughout the 2024 Presidential campaign, with voters recalling the prices of basic necessities like food and gas rising sharply over the past few years. Although inflation has significantly fallen since its peak in mid-2022, Americans have continued to face elevated prices and many are now looking to President-elect Donald Trump to ease their frustrations. But many of the policy changes Trump has discussed could drastically drive inflation up just as it has come down.
On the campaign trail, Trump constantly reiterated his intentions to implement sweeping trade and immigration policies. A group of twenty three Nobel Economists warned of “higher prices, larger deficits, and greater inequality” as a result of Trump’s proposals, and with recent threats from the president-elect to interfere with Federal Reserve independence, concerns for reigniting inflation continue.
The Peterson Institute estimates the combination of tariff and immigration proposals – along with the threats to Fed independence – would increase inflation by more than 4 percent.
Source: Peterson Institute
Inflationary Effects of Trump’s Tariff Proposals
Coining himself a “Tariff Man,” President-elect Donald Trump has made the implementation of wide-reaching tariff policies central to economic policy in his second term. In his view, tariff increases would reduce trade deficits, increase revenue, protect American industries, and force trading partners to the negotiating table. Building on work from his first term – and with a largely unchecked power to levy tariffs independent of Congressional approval –Trump has proposed to widen the scope of this policy dramatically.
Trump campaigned on implementation of a 10-20 percent tariff on all imports entering the United States while raising tariff rates on goods from China to 60 percent. He even briefly threatened a 200 percent tariff on Mexican-made cars and 100 percent tariffs on goods made in Mexico, threatening his own work on the United States-Mexico-Canada Agreement (USMCA).
In 2018, Trump levied tariffs on more than $380 billion worth of goods resulting in an average $200-$300 tax increase per US household, according to the Tax Foundation. Most of Trump’s tariffs have been maintained by President Biden, supplemented by targeted tariffs levied on key products such as solar panels, batteries, and electric vehicles. Targeted tariff policies on critical sectors, especially when paired with strategic investment, are more effective than blanket tariffs. Even more effective are tariffs against an adversary that are coordinated between allies; however, Trump’s unilateral and blanket 10-20 percent tariff proposal on our closest trade partners is not only inefficient but sets the stage for a global trade war in which the United States stands alone.
Lower-income households disproportionately feel the burden of such sweeping tariff plans as these households typically consume more imported goods than higher-income households. Tariffs are widely regarded as a regressive tax by economists, and, while it would cost the typical American household over $2,600 per year, those in the lowest and second quintile of income would be subject to a more significant financial burden. The effects would be immediate with The Budget Lab at Yale University estimating Trump’s tariff proposals would initially raise consumer prices by as much as 5.1 percent.
Source: Peterson Institute
Estimates of inflationary and general economic impact largely depend on the degree to which businesses and other countries react. For example, American companies like Stanley Black & Decker and Autozone have already indicated they will be forced to raise prices for their customers in response to Trump’s proposals. American businesses are also rushing to renegotiate contracts with suppliers and to stockpile their goods while prices can be locked in, in hopes of softening the costs to come, contributing to increasingly chaotic and unpredictable markets.
While companies work to prepare themselves, other countries are also eyeing their options for response. The Yale Budget Lab found that while Trump’s tariff proposals could raise between $1.2 – $4.4 trillion over 10 years, when retaliation is considered, those estimates fall by 12-26 percent. Retaliation is a major concern for markets and risks upending the global trade system in a time of general geopolitical uncertainty. While it varies from country to country, retaliation would vary and could mean immediate retaliation in equal measure to match the United States’ policies. Other countries could specifically target critical American export sectors.
In an already price and inflation-sensitive populace, Trump’s tariff proposals threaten to re-aggravate consumers, promote a dangerous trend toward American protectionism, and throw markets into a period of chaos.
Inflationary Effects of Trump’s Immigration Policies
With the Presidential election in the rear view, Donald Trump’s immigration proposals are beginning to take shape with the swift appointments of Tom Homan as his “border czar” and Stephen Miller as Deputy Chief of Staff who will be on the front lines of the administration’s immigration agenda.
Ahead of his second term, the President-elect introduced plans to undertake “the largest mass deportation program in history,” for which a price tag is no factor – although the American Immigration Council estimates such deportation plans could cost at least $315 billion. Without detailing how exactly he would implement the removal of an estimated 11 million individuals living illegally in the United States, Trump also proposed to activate the National Guard and empower local police forces to enforce immigration laws. Trump’s immigration proposals pose grave moral and humanitarian risks with the threats of “ideological screening” for immigrants entering the country, ending birthright citizenship and reviving policies like “Remain in Mexico.” But his deportation plans also pose critical economic risks that threaten the labor market and contribute to rising consumer prices.
The Peterson Institute found that if only 1.3 million of the 8.3 million unauthorized individuals in the workforce were deported, inflation in the United States would increase from baseline by 0.35 percent in 2025 and 0.54 percent in 2026 with real GDP falling by 0.2 percent below the baseline in 2025 but 1.2 percent in 2028. If all 8.3 million people were deported, the United States would see an inflation increase of almost 3.5 percent over the baseline in 2026, meaning prices would rise over twice as fast as they currently are.
Source: Peterson Institute
Unauthorized immigrants are critical to the labor force, especially in the agriculture, construction, hospitality and retailing sectors. Trump’s deportation plans could decrease overall employment by 1.1 to 6.7 percent depending on the severity of the policy’s implementation and would have an outsized effect in these sectors. While the surges in immigration seen during the Biden administration caused outrage and posed challenges to many American communities, the spike in immigration also benefited the labor supply and even helped ease wage and price pressure.
Trump’s Potential Undermining of Fed Independence
The Federal Reserve is responsible for the nation’s monetary policy. The Fed’s Federal Open Market Committee (FOMC) meets regularly to adjust interest rates with the dual goals of ensuring stable prices and maximum employment. The FOMC opted to hike interest rates from near-zero in early 2022 in an effort to tame rising inflation and held rates at an elevated level ever since.
Trump has clashed with Federal Reserve Chair Jerome Powell on several occasions over the Committee’s interest rate decisions and sought to influence the politically independent process. Eroding the Fed’s independence could jeopardize faith in the FOMC’s ability to act responsibly to control inflation and protect the labor market. A Federal Reserve unwilling to increase interest rates in response to rising inflation could allow inflation to rise without a sufficient monetary policy check. Trump said in June that he would let Powell serve until the end of his current term which concludes in 2026, but his allies have reportedly drafted and floated plans to reduce Fed independence.
Conclusion
When taken together, Trump’s tariff and immigration proposals, along with his threats to undermine the Fed’s independence in its monetary policy decisions, would ultimately drive up prices and perhaps jeopardize existing mechanisms for controlling inflation, to the detriment of everyday Americans.
Furthermore, Trump’s stated plans to extend expiring provisions of the Tax Cuts and Jobs Act (TCJA) at a projected cost of around $5 trillion over 10 years – in addition to enacting additional, costly tax cut proposals – could further drive inflation away from the Fed’s two percent target. The Biden Administration went as far as to call Trump’s tax plan an “inflation bomb” in a memo released in May. Debt resulting from Trump’s tax plan could also interact with his other inflationary proposals as the national debt will become more expensive to finance if the Fed is forced to reignite interest rate hikes in full force in response.
While many voters saw Trump as a capable steward of the American economy, his proposals suggest the opposite. The plans he has laid out would make life more expensive for American families. As we continue to fight against the most dangerous of these proposals being enacted, we must take the steps we can to oppose radical changes that undo years of progress on inflation.