For years, the trend of rising inflation has cast a dark shadow over the United States economy. Consumers have been wondering how long the prices of the goods they need will keep rising. Investors, meanwhile, are forced to consider both the short and long-term effects it poses for financial markets. Data from the Bureau of Economic Analysis shows that economic growth has been rising steadily. However, concerns among many Americans still abound.
As the 2024 U.S. presidential election approaches, inflation is even more in focus as Donald Trump levies attacks against President Joe Biden, attempting to heap responsibility for the U.S.’s economic challenges onto his opponent. But while Trump repeats his claims that inflation and high prices are due to Biden’s policies, ample evidence suggests that his second term could lead to a surge in both.
Inflation Under Trump: Round 2
In a recent op-ed, Michael Strain, director of economic policy studies at the American Enterprise Institute, discussed two of Trump’s policy proposals. As the economist noted, Trump is focused on increasing tariffs on imported goods and reducing immigration if he is reelected. Strain hypothesized that both measures would lead to increases in inflation, thereby harming the economy even more. In his words:
“From an economic perspective, the trade and immigration policies suggested by Trump would surely impose meaningful price increases on consumers. That could spark an inflationary cycle — exactly what Trump is criticizing Biden for having created. They would be a very big deal with very noticeable economic effects.”
Let’s take a look at the data behind Strain’s claims. Trump’s tariff-centric approach to trade has already proved ineffective at spurring economic growth. In 2018, his tariffs against China sparked a global trade war. Despite his claims, it did not prove “easy to win.” A 2020 report from the nonpartisan Brookings Institute found that it negatively impacted gross domestic product (GDP) growth and led to the loss of 300,000 jobs in only one year.
Now, Trump is doubling down on more extreme policies, proposing a blanket 10% tariff on all imported goods. The Washington Post reports that this policy “would amount to tariffs on more than $3 trillion in annual imports — a more than ninefold increase in the volume of trade hit by tariffs from his first term.” If it were to go into effect, U.S. companies would likely respond to the newly imposed costs by raising prices, forcing consumers to pay more as well. Additionally, the possibility looms of trade partners firing back with tariffs of their own, driving up prices even more.
More Problems Ahead
Trump’s plans for immigration could push prices up even more. According to The New York Times, “he plans to scour the country for unauthorized immigrants and deport people by the millions per year.” That type of action would drastically reduce the labor force as companies, big and small, struggle to find the workers they need. Employers would have to respond by increasing wages. But that is exactly the type of scenario that could lead to a wage-price spiral. That macroeconomic term refers to scenarios in which higher pay directly leads to higher consumer prices.
In both cases, inflation under Trump would likely be even worse than it has been under Biden. If these trends continue, financial markets could see worse turbulence that the past few years have brought.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
