Less than 70 days have passed since the closely watched U.S. presidential election. After the current President Biden officially announced that he would give up the chance to run for re-election, the battle between him and Kamala Harris gradually became more intense.
However, with the U.S. Federal Reserve (Fed) hinting that it is likely to start cutting interest rates in September, economists have continued to warn recently that if Trump is re-elected as president, it may trigger a new round of inflation rebound, because His America-first policies are likely to drive up global costs.
Nobel Prize winner in economics: Trump 2.0 may exacerbate inflation
In this regard, economist Paul Krugman, who won the Nobel Prize in Economics in 2008, pointed out in a report in the New York Times that most economists still underestimate the potential of Trump 2.0. pressure from inflation. Specifically including the following three aspects:
1. Tariffs
Kluman first explained Trump's tariff policy. Trump has stated that he wants to impose a 10% tariff, especially to significantly increase the tariff rate on products from mainland China. Recently, he threatened to increase it to 20%. If Trump really implements it, it will lead to serious inflationary consequences, enough to push up prices to the point where the purchasing power of ordinary households will be reduced by 4%.
Kluman pointed out that Trump views trade from a mercantilist perspective, so those with a trade surplus are winners and those with a trade deficit are losers. Therefore, his ultimate goal is to eliminate the U.S. trade deficit. However, even if a 20% tariff rate is imposed, it will not achieve that goal, because American companies rely on a large number of imported parts and raw materials. If the tariffs are fully implemented, it will generally only push up the costs of the companies.
2. USD Policy
Tariffs tend to push up the dollar exchange rate and undermine U.S. export competitiveness. This is because "trade deficit = net capital inflow", unless the flow of foreign capital into the United States is reduced, the trade deficit cannot be reduced.
The usual way to reduce the deficit is to offset falling exports by reducing imports. Compressing a certain aspect of the trade deficit is like squeezing a balloon, squeezing the air elsewhere. As such, the consequence is a stronger dollar. Kluman pointed out:
Just imagine if the Trump 2.0 government introduced tariffs intended to eliminate the trade deficit, but found that it did not work. Trump and his advisers will surely adjust their policy ideas? Won't. According to Trump's acting style, not only will he not change course, but he will intensify his efforts and further raise tariffs.
What's more, Trump has stated that he wants the dollar to depreciate. If the dollar becomes stronger as a result of his tariffs, one can imagine Trump’s frustration.
3. Interference in Fed independence
Trump frequently sought to publicly pressure Fed Chairman Jerome Powell to ease monetary policy during his first term, and even discussed ways to replace him. This has raised concerns that the Fed's independence could be at risk during Trump's second term (in the larger context, research shows that countries with central banks free of political interference have lower inflation rates).
What other impact might Trump 2.0 have on inflation?
In addition to the tariffs, dollar policy, and intervention in Fed decision-making mentioned by Krugman, Bloomberg also pointed out in a report in July this year that Trump’s following policies may also push up inflation:
1. Tax reduction
When government spending exceeds revenue, it is actually creating money and moving it into the economy, which in turn increases price pressures. Trump has promised tax cuts, which will lead to an increase in the deficit, all else being equal.
Republicans have also pledged to rein in spending, but when the party controlled both the White House and Congress in the past, they did not impose sweeping spending restrictions. Trump has pledged to extend the tax cuts he enacted in 2017 that are set to expire at the end of 2025, and to eliminate or lower some other taxes.
2. Restrict immigration
Increased immigration can help curb wage pressure in the job market. However, Republicans' goal is not only to limit illegal immigration, but also to launch "the largest deportation operation in American history." This risks exacerbating inflation.
If Trump severely restricts immigration, it could cause disruption in the short term, increase costs and prices, and could even lead to some shortages in agriculture, construction, manufacturing, transportation and other labor-strapped industries.
3. Energy policy
Trump previously revealed in an exclusive interview with Bloomberg Businessweek that his anti-inflation plan is to lower prices by further developing U.S. fossil fuel resources, which will allow the Federal Reserve to lower interest rates. However, according to Bloomberg analysis, Fed officials are focusing on core inflation indicators that exclude energy and food costs. Most of the recent inflation comes from services, not energy.
All in all, many economists currently judge that Trump 2.0 is very likely to continue to push up costs around the world and trigger a rebound in inflation. For example, Michael Metcalfe, head of macro strategy at State Street Global Markets, said:
The policies introduced by Trump in his second term are more likely to trigger more severe inflation than in his first term.
Compared to 2016, when inflation was low and inflation expectations were low... 2024 and 2025 will be very different. Inflation is higher, inflation expectations are higher, and we are still in this inflationary mindset.
