(Bloomberg) -- Speaker after speaker at the Republican National Convention this week has laid the blame for high inflation with the Biden administration.
Virginia Governor Glenn Youngkin denounced “the silent thief of inflation unleashed by Joe Biden and Kamala Harris.” Florida Senator Rick Scott highlighted that under Donald Trump “inflation and mortgage rates were low.” But now, South Carolina Senator Tim Scott said, “inflation is crushing families.”
“End inflation, and make America affordable again,” the Republicans declared in their official campaign platform.
The irony is, Trump’s platform — including tax cuts, tariff increases and a crackdown on immigration — would, in the view of many economists and investors, stoke price pressures. As the Federal Reserve prepares to start monetary easing, the potential shift in an array of policies looms as a risk for sustained interest-rate cuts in 2025.
“On their face, the stated policies would bring at minimum a significant burst of inflation,” said Julia Coronado, the founder of MacroPolicy Perspectives LLC and former Fed economist.
Investors have dubbed bets in the Treasury market on higher yields on longer-dated securities — reflecting stepped-up inflation expectations — as the “Trump trade.”
To be sure, Trump’s ability to implement many of his proposals will depend on the composition of Congress. Moreover, some of Trump’s policy ideas remain vague declarations, subject to substantial change if he’s elected, especially if financial markets push back.
“What will a Trump administration do when faced with real tradeoffs?” Coronado said. “That’s a real source of uncertainty.”
But if Trump does follow through on proposals he’s laid out, here’s how they may influence prices:
Tax Cuts
When the government spends more than it collects, it’s effectively creating money and pushing it into the economy — adding to pressures on prices. The widening of the fiscal deficit in recent years has been blamed for contributing to inflation.
Trump is promising to cut taxes, which, all else equal, will increase the deficit. Republicans have also pledged to rein in spending. But when the GOP in the past controlled both the White House and Congress, no such sweeping spending restrictions were enacted.
Trump’s pledge is to extend the cuts he enacted in 2017 that are set to expire at the end of 2025, and eliminate or reduce a number of other levies. In an interview with Bloomberg Businessweek published Tuesday, Trump said he wanted to cut the corporate rate further, to 15% from the current 21%.
Republicans also aim to do away with taxes on tips. That could add as much as $250 billion to the deficit over a decade, according to the the nonpartisan Committee for a Responsible Federal Budget.
“Tax cuts don’t pay for themselves,” said Jeffrey Sherman, deputy chief investment officer at DoubleLine Capital. “The worst outcome for markets is a Republican sweep” of both the White House and Congress, he said.
Tariff Hikes
Unless sellers, importers and retailers lower their profit margins to absorb the extra cost, higher tariffs will jack up prices for all end-users. A one-time tariff hike would suggest a one-off contribution to inflation, though a Republican commitment to reciprocal trade measures opens the possibility of a continuous ratcheting up of levies.
Trump’s preferred tariff rates are unclear, and he stopped short of specifying them in the Bloomberg Businessweek interview, while wholeheartedly endorsing them as a policy measure. “Economically, they’re phenomenal,” he said.
The GOP platform calls for a “baseline” tariff. The Trump campaign had earlier floated the idea of a 10% universal rate, as well as a 60% levy on all goods from China, though Trump declined to endorse those specific numbers in the interview. Such a tax on Chinese imports would amount to an annual cost for the average middle-income family of $1,700, according to a study by the Peterson Institute for International Economics.
“It’s a stagflation type of policy,” said Mark Zandi, chief economist at Moody’s Analytics. “That’s why economists hate tariffs. They hurt inflation and growth at the same time.”
Immigration Curbs
A historic influx of immigrants in recent years has contributed to a notable expansion of the US labor force, in a dynamic that economists say has damped wage pressures. Republicans aim to not only curb illegal immigration but to mount “the largest deportation operation in American history.”
That threatens to prove inflationary, though it could also alleviate pressures on areas like housing, where insufficent supply has pushed up costs. Zandi said that if Trump severely restricts immigration, it could be disruptive in the short term.
“It would add to costs and prices and may even cause some shortages in agriculture, construction, manufacturing, transportation” and other sectors where the labor market is tight, he said.
Dollar Policy
When the dollar appreciates against other currencies — as it has in recent years driven by Fed rate hikes — that helps ease inflation by lowering the cost of imports. The flip-side is that a drop in the dollar adds to price pressures.
Trump said in the interview that “the dollar being high” against the Chinese and Japanese currencies has left those countries with an advantage. “We’re in a very bad position,” he said, without specifically calling for a cheaper dollar. His new running mate, JD Vance, has openly called for a weaker greenback, however.
“‘Devaluing’ of course is a scary word, but what it really means is American exports become cheaper,” Vance told Politico in April.
Energy Policy
“Inflation was caused by energy,” Trump said in the interview. He said his plan is to lower costs by embracing further exploitation of US fossil-fuel resources. This would then allow the Fed to lower interest rates, he said.
Fed policymakers, however, target core inflation gauges, which strip out energy and food costs. Most inflation lately has come from services, not from energy.
Fed Independence
Trump in his first term regularly attempted to put public pressure on Fed Chair Jerome Powell to ease monetary policy, and even discussed seeking ways to remove him. That’s stoked concern about potential threats to Fed independence in a second term. The broader context: Research shows countries that shelter their central banks from political interference experience lower inflation.
In the interview, Trump said he’d let Powell serve out his chairmanship, which runs to 2026, “especially if I thought he was doing the right thing.”
“You’re playing with fire if you start eroding the independence of the central bank,” Coronado said. And the risk, she added, is global. “To mess with that, particularly for the world’s reserve currency, is extraordinarily dangerous.”
--With assistance from Liz Capo McCormick and Ye Xie.
©2024 Bloomberg L.P.
