Donald Trump ran for president in 2024 promising to get prices down and end the runaway inflation that swamped Joe Biden’s presidency. Now that he’s in office, however, Trump is grappling with the same inflation two-step that left Biden flummoxed.
On one hand, some indicators show that inflation pressures are declining and inflation might not be a problem 12 months from now.
But on the pesky other hand, the Federal Reserve is now concerned about reflation and has halted its interest rate-cutting cycle after just four months. One of their worries is Trump himself, who could trigger higher inflation through tariffs that raise the cost of imports and the deportation of migrant workers, which could push labor costs higher.
Trump could ease these worries, but for now he’s choosing not to. Trump seems determined to use the first few months of his presidency to play his full “America first” hand while letting the threat of ruinous tariffs and mass deportation hang over markets.
Trump didn’t issue new tariffs as part of his Day One or Week One agenda, but he insists they’re coming— on Canada and Mexico first, then on China and other trade partners. His deportation efforts so far have been more show than substance, but his immigration officials say they’re just getting started.
Investors, accordingly, are factoring in escalation risks. At its January meeting, the Fed made no change to short-term interest rates, noting that “the economic outlook is uncertain” and sounding a more hawkish tone on inflation than it did in December.
Fed watchers interpreted that as a reference to fresh concerns about inflationary Trump policies. “The odds of a cut before mid-year are falling,” Capital Economics reported on Jan. 31. “If the Fed doesn’t act soon, the likely tariff-related resurgence in inflation from mid-year onwards will probably keep the Fed on the sidelines for the foreseeable future.” The forecasting firm says it expects Trump’s policies will have a “mildly stagflationary impact” that will push real GDP growth from 2.5% in 2024 to less than 2% by the second half of 2025.
Consumers expect higher inflation too. The Conference Board’s latest monthly survey shows that consumers expect inflation, currently 2.9%, to jump to 5.3% a year from now. That’s in line with University of Michigan surveys showing consumers expect Trump’s tariffs to raise prices. The Conference Board survey also showed that confidence dropped to the lowest level in four months, with Americans also worried about a tightening job market.
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