Trump Plans Risk Spurring US Inflation That GOP Is Pledging to End

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(Bloomberg) — Speaker after speaker at the Republican National Convention this week blamed the Biden administration for rising inflation.

Virginia Gov. Glenn Youngkin denounced “the silent thief of inflation unleashed by Joe Biden and Kamala Harris.” Florida Sen. Rick Scott asserted that “inflation and mortgage rates were low under Donald Trump.” But now, South Carolina Sen. Tim Scott said, “inflation is crushing families.”

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The Republicans’ official platform declared: “End inflation and make America affordable again.”

Ironically, Trump’s agenda—including tax cuts, higher tariffs, and tougher immigration measures—is seen by many economists and investors as fueling price pressures. And with the Fed poised to begin easing monetary policy, a potential shift in policy looms as a risk that interest rates will fall sustainably in 2025.

“On the face of it, the announced policies would at the very least lead to a significant increase in inflation,” said Julia Coronado, founder of MacroPolicy Perspectives and a former Fed economist.

Investors have dubbed bets in the Treasury market on higher yields on longer-term securities — which reflect rising inflation expectations — the “Trump trade.”

Whether Trump can implement many of his proposals will certainly depend on the makeup of Congress. Moreover, some of Trump’s policy ideas remain vague statements, subject to substantial changes if he is elected, especially if financial markets resist.

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“What will the Trump administration do when faced with real trade-offs?” Coronado said. “That’s a real source of uncertainty.”

But if Trump implements his proposals, here’s how they might affect prices:

Tax cuts

When the government spends more than it collects, it effectively creates money and pushes it into the economy—which puts pressure on prices. Some have blamed the widening fiscal deficit in recent years for contributing to inflation.

Trump has promised to cut taxes, which all else being equal would increase the deficit. Republicans have also pledged to rein in spending. But when the GOP controlled the White House and Congress in the past, such sweeping spending restrictions were not enacted.

Trump’s pledge is to extend the 2017 tax cuts, which are set to expire in 2025, and eliminate or reduce a number of other taxes. In an interview with Bloomberg Businessweek published Tuesday, Trump said he wants to cut the corporate rate even further, to 15% from the current 21%.

Republicans are also seeking to eliminate the tax on tips. That could add as much as $250 billion to the deficit over a decade, according to the nonpartisan Committee for a Responsible Federal Budget.

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“The tax cuts don’t pay for themselves,” said Jeffrey Sherman, vice president of investment at DoubleLine Capital. “The worst outcome for markets would be a Republican sweep of the White House and Congress.”

Tariff increases

Unless sellers, importers, and retailers cut their profit margins to absorb the extra cost, higher tariffs would raise prices for all end users. Indeed, a one-time tariff increase would signal a one-time contribution to inflation, though Republicans’ commitment to reciprocal trade measures opens the door to the possibility of continued tariff increases.

But Trump’s preferred tariff rates are unclear, and he declined to specify them in the Bloomberg Businessweek interview, while wholeheartedly endorsing them as a policy measure. “Economically, it’s enormous,” he said.

The Republican platform calls for “substantial” tariffs. The Trump campaign has previously floated the idea of ​​a 10% global rate, as well as a 60% tax on all goods from China, though Trump declined to endorse those specific numbers in the interview. Such a tax on Chinese imports would cost the average household $1,700 a year, according to a study by the Peterson Institute for International Economics.

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“It’s a stagflationary policy,” said Mark Zandi, chief economist at Moody’s Analytics. “That’s why economists hate tariffs. They hurt inflation and growth at the same time.”

Immigration restrictions

The historic influx of immigrants in recent years has contributed to a marked expansion in the U.S. labor force, a dynamic that economists say has eased wage pressures. Republicans aim not only to curb illegal immigration but also to launch “the largest deportation operation in American history.”

That threatens to cause inflation, though it could ease pressure on areas like housing, where supply shortages have pushed up costs. If Trump imposes strict immigration restrictions, it could be devastating in the short term, Zandi said.

“This will increase costs and prices and may even cause some shortages in agriculture, construction, manufacturing, transportation” and other sectors where the labor market is tight, he added.

Dollar Policy

When the dollar appreciates against other currencies – as it has in recent years as a result of the Federal Reserve raising interest rates – it helps to ease inflation by reducing the cost of imports. The flip side is that a weaker dollar increases price pressures.

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Trump said in the interview that the “strong value of the dollar” against the Chinese and Japanese currencies gave those countries an advantage. “We’re in a very bad spot,” he said, without specifically calling for the dollar to fall. But his new running mate, J.D. Vance, has publicly called for a weaker dollar.

“Currency devaluation is a scary word, of course, but what it actually means is that U.S. exports are getting cheaper,” Vance told Politico in April.

Energy Policy

“Inflation is caused by energy,” Trump said in the interview. He said his plan was to cut costs by embracing more U.S. fossil fuels. He said that would allow the Federal Reserve to lower interest rates.

But Fed policymakers target core inflation measures, which exclude energy and food costs. In fact, most recent inflation has come from services, not energy.

Federal Reserve Independence

In his first term, Trump regularly tried to put public pressure on Fed Chairman Jerome Powell to ease monetary policy, and even discussed seeking to fire him. This raised concerns about potential threats to the Fed’s independence in a second term. The broader context: Research shows that countries that protect their central banks from political interference experience lower inflation rates.

Trump said in the interview that he would allow Powell to continue his presidency, which runs until 2026, “especially if I think he’s doing the right thing.”

“You’re playing with fire if you start eroding central bank independence,” Coronado said. The risks are global, she added. “To mess with that, especially for the global reserve currency, is very dangerous.”

—With assistance from Liz Capo McCormick and Yi Shi.

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