A growing number of investors and economists are predicting higher inflation if former President Trump and the Republican Party win a landslide victory in the next election.
As President Trump continues to widen his lead over President Biden in the polls, economists say his proposed tax and tariff policies could lead to higher prices after the incumbent president has battled inflation for more than two years.
Trump has proposed replacing the income tax with a 10% general tariff on imports, which would be levied on a wide range of goods and services. Republicans are also eager to extend provisions of Trump’s expiring 2017 tax cuts, which economists say would add fuel to the inflation fire.
“With the increased likelihood of a Trump presidency, the likelihood of higher tariffs also increases. Higher tariffs will lead to higher costs of doing business, which means some higher inflation,” Axel Merck, president and chief investment officer at Merck Investments, told The Hill.
Inflation is the result of a variety of economic forces, and there is no guarantee that any single policy will result in a linear increase in the prices of goods and services.
But President Trump’s 10% tariffs still raise inflationary alarms for some investors who expect higher business costs could be passed on to consumers.
“Trump has said he wants to raise tariffs by 10% across the board and 60% on Chinese imports. The tariffs would likely make imported goods more expensive, which could lead to inflation,” Ed Yardeni, president and chief investment strategist at Yardeni Research, told The Hill.
Asked whether raising tariffs and lowering domestic taxes would have an inflationary effect on the economy, the Trump campaign said the policies would lower prices, not raise them.
“If President Trump returns to the White House, he will reimplement his America First, pro-growth, pro-jobs policies to reduce inflation and improve life for all Americans,” a campaign spokesman told The Hill.
The campaign also said Trump is trying to make permanent provisions of the 2017 tax cuts that have expired, a move the Biden administration opposes.
“President Trump has pledged to sign additional tax cuts for workers and families, eliminate the tip tax and make historic tax cuts permanent,” the Trump spokesman said.
Two years of high inflation have raised the cost of living for many Americans and sparked unionization efforts across the country, but experts warn consumers are not ready to deal with another round of rising prices.
“With reduced retail spending, reduced savings, increased credit card usage and rising credit card default rates, consumers are not in a position to pay higher prices for anything,” Daniel Alpert, managing partner at Westwood Capital, told The Hill.
Investors stepped up bets on higher inflation over the long term shortly after Trump was widely seen as outperforming Biden in the June presidential debate.
Immediately after the debate, yields on 10-year Treasury notes rose sharply against two-year notes, which experts see as a sign that the market is expecting higher inflation in the future.
“On the Monday after the debate, 10-year Treasury yields rose about 20 basis points, which I think was a knee-jerk reaction from the bond market to the increased likelihood of Trump winning a second term in the White House,” Yardeni said.
Economists at Moody’s Analytics also predict that inflation would rise in a scenario in which Trump wins the White House and Republicans hold majorities in both houses of Congress.
“Broadly speaking, policies adopted in a Republican-suppression scenario would lead to higher inflation and weaker economic growth,” economists Mark Zandi, Brendan La Cerda and Justin Begley wrote in a June analysis.
“The proposed tariff policies would raise costs for businesses, which would in turn stifle growth and productivity and fuel inflation as businesses pass on many of these higher costs to consumers,” they wrote.
Beyond the inflationary effects, President Trump’s tariff proposals are being viewed with skepticism and outright disdain by many policymakers in Washington purely for revenue generation reasons.
The libertarian Cato Institute called the plan “dangerously foolish” and said it falls into “unicorn calculus at every turn,” essentially pointing out that the U.S. doesn’t take in enough imports to cover spending through tariffs.
In practical terms, tariffs are likely to lead to retaliatory measures by foreign governments, which could have a negative economic impact, Erica York of the Tax Foundation, a Washington think tank, wrote in a recent report.
Tariffs are essentially measures meant to protect domestic industries such as manufacturing, but they can also be counterproductive by increasing overhead costs and harming the companies they are meant to protect.
In a 2019 study, Federal Reserve economists Aaron Fraen and Justin Pierce concluded that tariffs enacted by President Trump during his first term actually led to manufacturing job losses.
“For manufacturing employment, the small gains due to the import protection effect of tariffs are more than offset by larger declines due to higher input costs and the effects of retaliatory tariffs,” they wrote in a 2019 research paper.
Still, inflation remained low during the last Trump tariffs, even though Fed researchers said they were unprecedented, and the Trump campaign was quick to point that out.
“By cutting regulations and taxes and using America’s influence to negotiate better trade deals around the world, President Trump has built the strongest economy in American history with virtually non-existent inflation,” the campaign said in response to The Hill.
Several recent Supreme Court decisions have limited the power of federal agencies, which could affect price levels if companies no longer have to comply with certain regulations.
Investors told The Hill that it is still too early for markets to start pricing in the changes associated with the current import tax proposals.
“If that happens, the market is not taking it seriously enough,” Yardeni said. “Otherwise the market will [and] The industry has concluded that it is premature to make portfolio changes based on what may or may not happen.”
Republicans are preparing to fast-track tax cuts through the budget reconciliation process but face internal disagreements, with some lawmakers wanting to lower the corporate tax rate from its current 21 percent rate while others are seeking to simply extend expired provisions.
The Congressional Budget Office estimates that extending President Trump’s tax cuts could add another $4.6 trillion to the budget deficit, which has reached a new level of about 120% of gross domestic product as a result of pandemic-related relief measures.
The International Monetary Fund warned in June that the United States needs to reduce its budget deficit over the next decade to keep investors interested in U.S. Treasuries.
