Was the dragon killed? Or just wounded?
Inflation has been the scourge of the economy for the past three years. The percentage rose from 1.4% when President Biden took office in 2021 to a high of 9% about 18 months later. The Fed made its goal by raising interest rates quickly, and it seemed to work. By September, inflation had fallen to 2.4%, roughly in the normal zone.
Then, an upward jump. The latest data shows that inflation rose to 2.6% in October. This could be a spot on an x-ray that turns out to be nothing. Or it could signal that inflation is starting to return, which would confound expectations about interest rates, financial markets, and the policies of the incoming Trump administration.
October’s inflation surge was not a fluke due to hurricanes or other one-time anomalies. The most important categories of goods and services rose, including food, energy, rent and vehicles. This came one month after the Federal Reserve declared its victory over inflation. In September, the Fed reversed its monetary policy and began cutting interest rates, signaling that it was time to worry about maintaining growth rather than cutting rates.
The Fed is staying the course for now. He cut short-term interest rates again on November 14 and may do so again at the next policy meeting in December. But the odds of further interest rate cuts are declining, with policymakers waiting for more laboratory results in the form of upcoming inflation data.
“Inflation may soon be front-page news again,” Capital Economics declared in a November 13 analysis. The forecasting firm says the current inflationary trend is OK, but the future outlook is more worrying – largely because of what Donald Trump plans to do once he takes office next January.
At least two items on Trump’s agenda are inflationary: new tariffs on imports and mass deportations of illegal immigrants. Tariffs are taxes that directly raise the cost of imported goods. Deporting immigrants would reduce the size of the labor force, especially targeting low-wage workers. Replacing them with workers who might demand higher wages — or with more expensive machinery — would raise costs one way or another, with producers passing on as much as possible to consumers.
A third concern about inflation is Trump’s desire to cut taxes further, which can have a stimulative effect by putting more money in people’s pockets, boosting spending and demand, and sometimes causing prices to rise.
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“Given everything that President-elect Trump has promised so quickly — such as raising tariffs, cutting taxes further, and reducing immigration — one can easily expect inflation to accelerate again next year,” said Bernard Baumol, chief global economist at the Economic Outlook Group. , wrote on November 13. “The Federal Reserve is now in real trouble.”
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