 "What is Trump-flation? Why are economists worried about it?")
Donald Trump is running for president yet again – and some economists are worried about what that could mean when for inflation if he actually wins a second term.
Trump’s talk of trade wars, imposing tariffs, wanting to weaken the dollar and order the Fed around has spooked many economists and left them worried about a term called Trump-flation.
But what is Trump-flation? Why are economists worried?
Let’s take a closer look:
What is it?
The term “Trump-flation” first began being used around the 2016 US polls, as per Investopedia.
It referred to worries about inflation possibly getting out of control during Trump’s presidency.
Trump, remember, had promised to spend $1.5 trillion on infrastructure over a decade,.
However, that promise came to naught with the Republicans hyperfocused on tax cuts for the rich and trying to repeal Obamacare – and even became somewhat of a running gag in the media as the White House kept promising that ‘infrastructure week’ was imminent.
Trump had also vowed to reduce or eliminate the entire US national debt – just under $20 trillion at the time he took office.
This led some expressed concern that Trump might seek to ‘inflate his way’ out of the national debt – or even subject the US to massive austerity to wipe away the deficit.
Impact Shorts
More ShortsTrump had also made statements like ‘trade wars are good and easy to win’ and promised to impose tariffs on China and other protectionist ideas which worried economists.
The increase in incomes over tax cuts, a spike in domestic wages because of immigration restrictions also added to the concern about Trump-flation.
However, talk about Trump-flation tapered off after his first year in office – after many realised that the governing agenda was being set by the Republicans in the House and the Senate and not the president (despite much of his bluster).
The average yearly inflation rate during Trump’s time in office was around 1.9 per cent – almost exactly the Federal Reserve’s target of two per cent, as per Investopedia.
Why are economists worried?
Because though inflation keeps going up, the level of it usually depends on whom is in power – and their policies.
Fortune quoted experts as saying that inflation under a second Trump term could touch nearly 3.8 per cent.
The outlet quoted Oxford Economics deputy chief US economist Bernard Yaros Jr as writing last week, “It’s only the degree to which GDP and inflation are higher under the next president that differs depending on the political configuration.”
And because this time around, Trump may govern far differently.
The so-called normal Republicans who served in Trump’s first administration have shown little appetite at wanting to repeat the experience – which likely means he is far less likely to be hemmed in by the moderates.
Trump himself has signalled that he will only appoint the most hardcore and loyal of his supporters – who wouldn’t bat an eye before carrying out his whims and fancies.
Left to his own devices and aided by the right-wing Republicans in Congress, Trump may very well seek to cut taxes even further and make good his threat of slapping on tariffs.
Trump has mused about slapping a 20 per cent tariff on China.
Yaros told Fortune such a move would be especially inflationary, contributing a “large chunk” to rising prices.
The outlet quoted studies as saying Trump’s proposed tariffs could cost US households anywhere from $1,700 to $2,350 extra per month.
Others agree.
“There’s a bigger risk that Trump’s policies will be more inflationary in a second term than they would have been in the first,” Michael Metcalfe, head of macro strategy at State Street Global Markets, told _CNBC’_s “Squawk Box Europe.”
“Compared to 2016, when inflation had been low forever and inflation expectations were low … 2024, 2025 is going to be very different,” he continued. “The level of inflation is higher, inflation expectations are higher, and we’re still in this inflation mindset.”
If consumers “are upset now, they will be hopping mad a year from now” about inflation if Trump wins and enacts his policies, Mark Zandi, chief economist of Moody’s Analytics told CBS MoneyWatch.
Paul Krugman, writing i_n The New York Times,_ pointed to a Wall Street Journal poll of economic experts that projected inflation would be higher under Trump than his Democratic opponent.
But Krugman warned that analysts are underestimating how bad things could get.
“Why? Because I don’t think even most economists fully appreciate the possible interactions between Trump’s love of tariffs, his desire to politicize the Fed and his expressed desire for a weaker dollar,” Krugman wrote.
Krugman predicted Trump would increase tariffs, try to weaken the dollar and even co-opt the independent Federal Reserve to try to push down interest rates.
“So here’s my Trump-flation story: After being returned to power, Trump, with his mercantilist views, tries to eliminate trade deficits with tariffs. When this fails, in part because the value of the dollar has gone up, he raises tariffs even higher, while leaning on the Fed to cut interest rates to push the dollar back down. All of this would be seriously inflationary. So, by the way, would mass deportation of a significant part of the US work force,” Krugman wrote.
Krugman said Trump would look to emulate Turkey’s President Tayyip Erdogan – who rejected conventional economics and increased inflation to 85 per cent before coming around.
“It would take a lot to get America, which starts from a strong position, into that much trouble, but I don’t believe that most analysts are fully realizing just how bad Trump-flation might get,” Krugman concluded.
However, some disagree.
EJ Antoni, a research fellow and public finance economist at the conservative-leaning Heritage Foundation, told CBS MoneyWatch that economists are failing to “look at the broader picture."
“As far as what [Trump] has said in public, it is to reduce federal income taxes and corporate taxes, and essentially replace that with tariffs," Antoni said. “I understand the argument that tariffs are a tax on trade, but so is the income tax. If all these things are taxes on trade, do you want a tax on domestic trade or international trade?”
But that opinion remains a minority.
Julia Coronado, founder of MacroPolicy Perspectives and a former Fed economist, told the outlet, “What he’s proposing on tariffs is way beyond anything he did in his first administration. He’s proposing blanket tariffs on all imports, and especially severe tariffs on China — that passes onto consumers immediately.”
“Trump wants a combination of things that economists know don’t add up,” Coronado added. “He’s promising, ‘I can have my cake and eat it too’.”
Trump himself doesn’t seem to understand how tariffs, or their impact on inflation, work.
In a Time Magazine interview from April, Trump allowed that tariffs would increase prices for consumers but did not agree it would cause inflation.
“I don’t believe it’ll be inflation,” Trump was quoted as saying. “I think it’ll be lack of loss for our country.”
With inputs from agencies
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