Steep inflation has haunted Americans as our number one bogeyman over the last two and a half years.
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“We’ve experienced high inflation over the last three years because of how much money we flooded into our financial system as a response to the COVID-19 pandemic,” explains CFP and MBA Scott Sturgeon of Oread Wealth. “These include stimulus checks, PPP loans, quantitative easing and other pandemic-era policies that lingered too long. The more dollars there are pursuing the same goods and services, the more those goods and services will increase in price as a response.”
Trump’s proposed policies prove a mixed bag for their impact on inflation. Some would likely reduce it, while others would exacerbate it. Consider the push and pull of each as you prognosticate future inflation rates.
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Deflationary Policies Under Trump
Sara Routhier, finance expert with FreeAdvice.com, sees a slow road ahead. “If Trump wins, it will most likely take two to three years to recover from the inflation we have seen over the last few years. If Harris wins the election, there is a good chance that inflation will continue to rise.”
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So which of Trump’s policies will help reduce inflation?
Slower Immigration
“Trump’s tighter immigration policies should help reduce inflation,” observes Routhier. “The government would spend less on undocumented immigrants’ housing, medical expenses, and other assimilation costs.”
Reduced government spending isn’t the only reason why slower immigration would also slow inflation. Immigration fuels population growth, which in turn fuels economic growth through higher demand for goods and services. Inflation goes hand in hand with hot economic growth, so reducing population growth and consumer demand should tamp down on inflation.
Greater Domestic Energy Production
At rally after rally, Trump has promised to “drill baby drill” to increase domestic oil and gas production. Greater energy supply drives down energy prices, helping to reduce inflation.
Melanie Musson, a finance expert with Clearsurance.com, points to lower US energy prices and fewer foreign imports. “If Trump is elected again, you can expect a shift away from foreign dependence, similar to his first presidency.”
Reduced Federal Spending (Maybe)
More government spending means more money flooding into the economy. Read: inflation.
Historically, Republican candidates have proposed slimmer government spending, which can help cut inflation. That said, Donald Trump is by no means a classical conservative.
Trump’s first administration continued to spend more each year, outspending the Obama Administration in every year per The American Presidency Project.
You could make a case that a second Trump Administration would increase federal spending at a slower pace than a Harris Administration. But that argument rests on the “lesser of two evils” for exacerbating inflation, as opposed to a policy solution.
Trump Policies that Would Increase Inflation
Many of Trump’s policy proposals would increase inflation rather than continue taming it.
Pressuring Lower Interest Rates
Despite appointing Jerome Powell as the chair of the Federal Reserve, Donald Trump has been his fiercest critic. He told Fox Business earlier this year that he wouldn’t reappoint Powell, and accused him of being “political.”
In fact, Trump has gone so far as claiming the power to fire a sitting Fed chair, as reported by The Hill. He has repeatedly campaigned this year on lowering interest rates — which of course fuels inflation.
“Higher interest rates have helped cool inflation by cooling down an overheated economy,” explains Sturgeon. And racing to slash interest rates too quickly can drive inflation rates right back up again.
Tariffs
It doesn’t take an economist to see that adding new taxes on imports makes those imported goods more expensive. Retailers don’t just eat those higher costs — they pass them on to consumers. “Broad tariffs typically raise prices for everyday goods,” explains Paul Tyler from annuity provider Zinnia.
Trump initially called for a 10% blanket tariff on all imports, which he has more recently raised to 20% as reported by CNBC. On Chinese imports, that rate would jump to 60%.
That spells inflation on imports, for everyday consumers.
Tax Cuts
Tax cuts stimulate the economy by leaving consumers and companies more money to spend, grow, and hire.
To juice the economy, Trump has proposed extending the provisions from the Tax Cuts and Jobs Act of 2017 indefinitely, and reducing the corporate tax rate from 21% to 15% (see this analysis by the Tax Foundation).
Sometimes the economy does need stimulating. But when the economy is overstimulated — like it’s been for the last three years — that stimulus leads to inflation.
Reduced Federal Regulation
Government regulation works like a throttle on the economy. When the government tightens regulation, it squeezes the flow of goods and services, while loosening regulation increases the flow.
Like reducing taxes, reducing regulation stimulates the economy, which is in turn inflationary.
Dana Miranda, Certified Educator in Personal Finance and author at Healthy Rich, sees regulation as a check on retailers raising prices. “Corporate price gouging can be a major factor in inflation, and it can be addressed with regulation by federal agencies. Harris has proposed regulatory and tax increases on corporations. Trump’s policies favor corporations and likely wouldn’t wrangle inflation any better than it is now.”
Final Thoughts
Each candidates’ policies would have a mixed effect on inflation. Don’t expect either candidate to wave a magic wand and make inflation disappear.
Instead, expect a slow march back to 2% inflation — or a fast drop if the economy falls into recession.
Editor’s note on election coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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