At a campaign rally in North Carolina on August 14th 2024, Trump stated “Prices will come down. You just watch: They’ll come down, and they’ll come down fast – not only with insurance, with everything.” While similar promises of disinflation – and, in some cases, deflation – were central to his campaign rhetoric, the effectiveness of his proposed strategies for achieving these goals remains uncertain. Trump himself acknowledged the challenges in a TIME Magazine interview in which he said “I’d like to bring them down. It’s hard to bring things down once they’re up. You know, it’s very hard.”
During Trump’s first weeks as president, many statements and executive actions highlighted his efforts to address inflation, focusing on four key areas: energy policy, regulatory reform, trade policy, and commentary on monetary policy.
With respect to energy policy, Trump’s motto has ostensibly been “drill, baby, drill,” reflecting his aim to increase production, reduce gas and oil prices, and ultimately lower the cost of final goods that rely on energy as an input. This attitude was displayed during his inaugural address, stating, “Energy prices permeate every part of the economy, so increasing US production of oil, natural gas, and other fossil fuels is critical to bringing down costs for American families.” To this end, a national energy emergency was declared, which Trump plans to expedite higher oil and gas production by lifting restrictions on previously protected areas, invoking the Defense Production Act and eminent domain to facilitate construction, withdrawing from the Paris Climate Agreement and directing federal agencies to rescind environmental regulations. Trump further aims to reduce oil prices internationally by pressuring OPEC to boost production. Whether this approach to reducing inflation through lower energy costs will be effective is unclear. According to the most recent US CPI statistics, energy costs are the only component of the 12-month CPI to be negative, while the largest source of inflation is in services, which is perhaps the least sensitive to energy costs. On top of this, the US is currently producing the most oil and natural gas of any country in human history and it’s not obvious that oil firms want to produce more.
Next, Trump aims to reduce inflation by targeting and eliminating regulations that drive up costs and prices across the economy. Like his predecessor, Trump has issued executive orders to reduce regulatory barriers in the housing sector including those related to zoning approvals, building codes, and other rules. The executive order highlights that regulatory burdens account for approximately 25% of the cost of constructing new housing. With shelter inflation at 4.6% in 2024, addressing price pressures in this area is a logical focus, but the impact will be subject to a significant policy lag. More broadly, Trump has instructed all federal agencies to identify opportunities to reduce inflation by eliminating regulations, the effectiveness of which depends on agencies’ ability to identify suitable regulatory targets and implement the proposed reforms – outcomes that remain uncertain.
Trump has also turned his attention to US monetary authorities, expressing a desire for greater influence over Federal Reserve leadership and its decision-making. His stance is reflected in remarks made on January 23, stating, “I think I know interest rates much better than they do, and I think I know it certainly much better than the one who’s primarily in charge of making that decision.” At Davos, he reinforced this position, declaring, “With oil prices going down, I’ll demand that interest rates drop immediately. And likewise, they should be dropping all over the world. Interest rates should follow us.” The president’s call for an accelerated easing cycle is unconventional and potentially inflationary amid some critics arguing the Fed has already been too quick to cut rates. Questioning the credibility of your central bank is usually seen to be counter-productive to be ability of the institution to manage expectations.
Finally, although its expressed purpose is not inflation reduction, Trump’s trade policies are highly relevant to the inflation discussion. During the recent 24-hour trade war, Trump threatened Canada and Mexico - the United States’ largest trading partners – with a 25% duty on all goods. He subsequently paused these tariffs for 30 days following agreements with both countries to enhance border security and combat drug trafficking, but implemented a 10% tariff on Chinese goods. The implementation of US tariffs is expected to increase domestic inflation and lead to tighter monetary policy than otherwise, and so unsurprisingly pushed yields higher. In contrast, outside the US, investors responded to fears of slower global growth stemming from these protectionist measures by purchasing Canadian, British, and EZ bonds, leading to a decline in yields.
The US administration has threatened additional tariffs against major countries and trading blocs, including the EU, ASEAN, and other BRICS nations. If US inflation rises because of tariffs, prompting a firmer monetary policy from the Federal Reserve, the dollar may continue to strengthen. In this scenario, imports from the US would become more expensive, potentially increasing the general price level in the UK and other countries. While Trump has repeatedly expressed a desire to devalue the dollar, which would make U.S. goods relatively less expensive abroad, it is difficult to see this happening, as many of Trump’s policies, such as tax cuts – which could stimulate US growth and necessitate tighter monetary policy – and tariffs, are likely to sustain or even strengthen the dollar’s position.
The policies discussed in this article are by no means exhaustive, and inflation could also be shaped by tax cuts, increased government spending, deportation of undocumented immigrants, or other as-yet unreleased policies. We’ll have to wait and see whether Trump’s policies do ease inflationary pressure, or whether, as feared, the combination of his favoured policies lead to rising inflation.
If you would like more information on our economic forecasting or borrowing cost projections, please contact us at treasury@arlingclose.com or 08448 808 200.
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