- High prices helped Trump get elected. Economists say his proposals could also be inflationary.
- Lower taxes, new tariffs, and deportations are seen by some as driving inflation and higher rates.
- The Fed may be forced to hike interest rates if inflation rebounds, raising borrowing costs.
Inflation was a key sticking point for the 73,479,065 Americans (and counting) who voted for President-elect Donald Trump.
Many people tired of high prices on everything from cars to gas to eggs and milk ended up voting with their wallets. Some of the states that saw the biggest swings toward Trump were ones where real wages had declined, giving people less spending power to fend off rising prices.
However, if Trump follows through with his campaign promises, some economists say that his second term could result in the type of inflation increase that helped him secure the White House.
While the extent of the inflation depends on how many proposals actually get executed, a consensus is building that the more heavy-handed versions of Trump's agenda would lead to higher prices.
The Trump camp has pushed back on this notion. On the campaign trail in August, the president-elect said his proposals would not influence US prices and swore to push them lower.
In the week leading up to the election, Taylor Rogers, a Republican National Committee spokesperson, told BI in a statement that if elected, Trump would "once again cut taxes and unleash American energy to lower prices on groceries and other goods."
Inflationary promises
The main Trump proposals viewed as inflationary are sweeping tariffs on imports, mass deportation of immigrants, and lower taxes.
Trump has proposed a universal tariff of as much as 20% and as high as 60% for goods from China.
The US Census Bureau has said that broad tariffs would impact the price of automobiles, drugs, food and beverages, furniture, and household appliances. An analysis by the nonpartisan Tax Policy Center said that Trump's tariff proposals would decrease posttax incomes by an average of $1,800 in 2025.
Tariffs are paid for by the companies importing goods into the country, rather than by the companies exporting their products to the US.
Typically, US companies simply pass the tariff costs to consumers via higher prices, and company executives are already signaling this to investors.
"If we get tariffs, we will pass those tariff costs back to the consumer," Philip Daniele, the CEO of AutoZone, said on a preelection earnings call.
"We're set to raise prices," Timothy Boyle, CEO of the retailer Columbia Sportswear, told The Washington Post in October about potential tariffs. "It's going to be very, very difficult to keep products affordable for Americans," he added.
Trump's promise to deport millions of immigrants is also seen as likely to boost inflation by shocking the labor market, especially in the sectors with large immigrant workforces like construction and agriculture.
A shortage of labor in these areas of the economy is expected to force companies to raise wages to attract new workers, which could in turn raise prices to make up for the higher cost.
The CEO of the National Association of Homebuilders told Business Insider before the election that mass deportations would ultimately lead to higher home prices and a slower pace of building.
"It's pretty clear to me, all else being equal, you reduce the labor supply very abruptly, and you're going to get an increase in inflation because of an increase in prices," the economist Wendy Edelberg told Business Insider in September. "That's relatively straightforward."
Finally, lower tax rates are typically viewed as stimulative for the economy and could unleash a wave of spending on goods and services by both consumers and businesses, with prices rising in the face of higher demand.
Possible inflation fallout
Some economists have said that if Trump delivers on all of these proposals, then a rebound in inflation is all but guaranteed.
"We're talking about an inflationary shock that is bigger than almost anything else that you could do through federal policy," the left-leaning Nobel laureate Paul Krugman said of the tariff plan.
A new bout of inflation would put the Federal Reserve on notice to start hiking interest rates again, which would further strain consumers via higher borrowing costs.
The bond market is already signaling this. Yields have surged since Trump's election victory and market-based inflation expectations have jumped to the highest level since April, as measured by the five-year breakeven inflation rate.
"It reflects legitimate worries about the path of government spending and what that could mean for inflation," Veneta Dimitrova, a Ned Davis Research economist, said in a note on Friday.
"With the economy already operating slightly above potential, additional government stimulus at this stage of the business cycle will likely be inflationary," Dimitrova added.
It's worth noting that the tariffs Trump enacted in his first term did not result in a significant inflation increase. The difference this time around — and the reason inflation forecasts are more stark — is how much deeper and more wide-reaching Trump's tariff proposals are for not just China but also the rest of the world.