A recent report from Moody’s Analytics found that inflation could accelerate again if former President Trump wins the White House and Republicans take control of Congress.
In a so-called Republican sweep scenario, which forecasters give a 35% chance of success, consumer price inflation would accelerate from 3% in 2024 to 3.6% in 2025, according to the three economists who wrote the report.
Trump administration policies, such as higher tariffs, tax cuts to stimulate the economy, and an outflow of foreign immigrants that could tighten the labor market and raise labor costs, will accelerate inflation.
“The Fed, with its focus on labor costs and inflation, may feel the need to resume raising rates or at least wait a little longer to cut rates, with a recession once again becoming a serious threat,” the economists wrote.
Inflation will be a key issue for voters ahead of the election.votePresident Biden has found himself facing low approval ratings for his management of the economy, largely due to prices rising about 19 percent since he took office in 2021.
Inflation has soared around the world due to supply chain disruptions related to the pandemic, a rapid economic recovery and the war in Ukraine. Inflation in the U.S. has also plummeted to just over 3% from a peak of 9.1% in June 2022. Still, Biden is struggling to win voter support on his economic policies.
The Federal Reserve has raised interest rates to their highest level in 23 years to tame pandemic-induced inflation, and is expected to start cutting rates later this year if inflation continues to fall.
The Labor Department’s latest Consumer Price Index (CPI) showed inflation in May at an annualized rate of 3.3%, meaning prices did not rise last month.
In contrast, the report said a Biden victory this November would have no impact on economists’ baseline inflation forecast of 2.4% for 2025.
If Biden wins the White House but Congress is divided (Moody’s puts the chances of that at 40%), economists predict inflation will continue to fall, returning to the Fed’s 2% target by the summer of 2025.
Moody’s Investors Service, a separate company from Moody’s Analytics, downgraded its outlook on the U.S. rating to negative from stable in November, citing risks to the U.S. fiscal health from high interest rates and rising debt.
“In the absence of effective fiscal policy measures to reduce government spending or raise revenues in an environment of rising interest rates, Moody’s expects U.S. budget deficits to remain very large and debt-service capacity to be significantly weakened,” the firm said in October.
Moody’s also warned of the risk of political polarization in Congress, which could affect lawmakers’ ability to “reach agreement on a fiscal plan that will slow the decline in debt repayment capacity.”
